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US long term interest rate up due to sales of dollars by foreign investors
Just recently, the U.S. long-term interest rate resumed its rapid climb, which had begun on May 1 as shown in the following graph of the U.S. Treasury bond yield:
In an August 19 commentary in Market Watch, Carla Mozee attributes the rising U.S. long-term interest rate to selling of U.S. Treasuries by Chinese and Japanese investors. Mozee writes:
This fits with my own analysis on June 26 (see Why US Interest Rates have been Rising since May 1). At that time, I quoted an article which held that Chinese banks were selling their treasuries, due to a liquidity crunch instigated by the People's Bank of China.
The movement of the U.S. long-term interest rate is being driven by sales of Treasury bonds by foreign central banks. This can be deduced from the fact that U.S. long-term interest rates are rising at the same time that the dollar is falling.
The rise of the U.S. interest rate is just beginning. It is going to be the big economic story of this coming fall. The effects are just beginning to be felt. They will likely include: (1) falling house prices, (2) reduced vehicle sales, (3) reduced availability of credit for consumers, (4) reduced availability of credit for businesses, (5) falling dollar, (6) falling U.S. stock market prices, and (6) rising U.S. government debt payments.
The good news is that the falling dollar will be good for the U.S. trade balance and so may not slow the economy overall.
Comment by jesse, 8/26/2013:
The falling dollar may also spur inflation, though this is dampened by dollar contracts in the near term.
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