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Where are interest rates going?

Before we answer this, it helps to understand what interest rates are. Interest rates are really the price of money: they balance the available supply of cash with the demand for loans. All the other factors–credit, time-frame, liquidity–just modify this.

So if you have good credit and borrow against solid collateral, lots of lenders will offer you a loan and your interest rate will be lower. Conversely, if you have lousy credit and only a few banks wants to lend you money, you’ll have to pay more.

So to understand the direction of interest rates, we have to understand money’s supply and demand. To start with, there is a huge supply of investible cash around the world. The Chinese have trillions. Other Asian countries and the Arab nations have billions. And there’s lots of talk about how US consumers are starting to save more.

So the supply is up. Who’s gonna borrow all that dough? Western governments like the US, UK and Japan: countries with budget deficits. Some M&A players need to borrow, though less of that is debt-financed these days. And not so many mortgage borrowers as before. But apart from government bonds, the demand for debt is decidedly down.

So with global savings up and borrowing down, I think we can plan on lower interest rates for a while. That should help the keep economy moving along. And the smart money will try to stay in front.

Douglas R. Tengdin, CFA
Chief Investment Officer
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