Tags: interest rates | stocks | bonds | bear

Rising Interest Rates Point to Possible Stock Market Crash

By    |   Friday, 31 May 2013 07:21 AM

In the United States, the yield on the 10-year Treasury note has topped 2.1 percent. While that is low by historic standards, it is up more than 25 percent in the last month. The interest rate on the equivalent 10-year note in Japan is up 54 percent in the past month.

In Japan, we have already seen the stock market react to higher rates with a sharp downward move. That follows the historical pattern of action seen in the United States.

Since 2000, there have only been two other times when long-term Treasury interest rates moved up by more than 25 percent in a year. Both times, stock prices fell at least 5 percent within weeks.

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Higher interest rates could make bonds more appealing to income investors. With the 10-year yield now greater than the yield on the Standard & Poor's 500, a shift into bonds seems very possible. That shift has probably driven the rapid decline seen twice before in the stock market.

Higher rates, even if they advance at a much slower pace, also threaten the global economy and could trigger recessions around the world. Global gross domestic product (GDP) is expected to grow by 3.1 percent this year, according to the Organization for Economic Cooperation and Development (OECD). That forecast is down from 3.4 percent that the OECD expected just a few months ago.

Growth in the United States is expected to be 1.9 percent, slightly more than Japan's 1.6 percent growth. Europe is expected to remain mired in a recession, with a 0.6 percent decline in GDP. Higher interest rates would threaten growth in the United States and Japan and could worsen the situation in Europe.

In the short term, higher rates would likely to lead to a sharp stock market decline.

Longer term, higher rates would widen budget deficits for the United States, Japan and European countries. A doubling of rates could increase deficits by billions and force policymakers to choose between austerity and inflation. That situation could lead to an extended bear market in stocks.

Stock market investors should follow interest rates to see if the next selloff stops after a 5 to 10 percent loss or develops into a new bear market.

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MichaelCarr
In the United States, the yield on the 10-year Treasury note has topped 2.1 percent. While that is low by historic standards, it is up more than 25 percent in the last month. The interest rate on the equivalent 10-year note in Japan is up 54 percent in the past month.
interest rates,stocks,bonds,bear
369
2013-21-31
Friday, 31 May 2013 07:21 AM
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