Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

Why U.S. long-term interest rates have been rising since May 1
Howard Richman, 6/26/2013

On or about May 1, the U.S. long-term interest rate started to rise as indicated by the interest rate on U.S. Treasury Bonds. I follow the movement of long-term U.S. interest rates on the following page:$UST10Y

The graph shows that around May 1, the 10 year U.S.Treasury bond interest rate turned on a dime. It had been going down from about March 11 (about 2.05%) to May 1 (about 1.65%). It has since headed up to about 2.55% today.

I have been trying to figure out the cause. There are several possibilities that could cause the U.S. Treasury bond rate to rise, including:

  1. Prosperity causes an increase in borrowing causing interest rates to rise. But there is no evident prosperity in the U.S. GDP data. In fact, U.S. economic growth seems to be stagnant in the 1.5% to 2% range.
  2. Growing inflation or inflationary fears cause nominal rates to rise. But the inflation rate in the United States was just 1.4% for the 12 months ending in May, according to the Consumer Price Index.
  3. Downgrading of U.S. government debt. But the recent projections show that the U.S. budget deficit this year will be far lower than last year.
  4. The Federal Reserve could be tightening the money supply. There are no Federal Reserve statistics available for the money supply of June or July, but in the three months ending in May, the Federal Reserve was still pedal-to-the-metal with an approximately 9% rate of increase in M1.
  5. Movement of foreign savings out of the United States. This appears to be the only explanation left. But who is taking money out? Not Japan. It's recent policy has been to buy U.S. assets in order to weaken the yuan

According to Lars Christensen, Danske Bank's chief emerging-markets analyst, China's big regional banks have been selling their Treasury Bonds because they are facing a short-term cash crunch. Here's a selection from a Bloomberg article about his explanation (Is China to Blame for Rising U.S. Interest Rates?):

Danske Bank's chief emerging-markets analyst, Lars Christensen, explained the theory to me earlier today. Last week, China's central bank deliberately withdrew liquidity and pushed up the short-term interest rates banks pay to borrow from each other, in an effort to shove the Chinese banking system toward less risk-taking.

That squeeze, Christensen explained, caused Chinese banks to dump Treasuries onto the market. (China's central bank is famous for being the largest foreign holder of Treasuries, but its four largest banks appear to have big stakes, too, according to annual balance-sheet statements.) The influx of sellers then sent Treasury yields up. The U.S. 10-year note now yields 2.6 percent, up 45 basis points since June 1.

Christensen's theory also fits with the fact that the yuan has risen from about $0.159 to about $0.162 since May 1. Chinese caught in the crash crunch could also be selling gold, which could explain why gold has fallen from about $1600 per ounce in mid-April to about $1225 per ounce today.

Chinese economic prosperity does not result in increased prosperity in the United States, due to China's mercantilist policy of continually growing the U.S. -China trade deficit.  But a Chinese financial collapse would give the U.S. some severe short term problems by driving American interest rates up severely and driving the dollar down rapidly.

If China hits a Black Friday 1929 moment soon, the financial collapse could spread worldwide. In 1929 the United States was the world's chief trade surrplus country. It had built up its economy in the expectation that an export boom could continue forever. But, eventually, mercantilists bankrupt the buyers of their products. When they call in their world-wide loans, their boom turns into a world-wide bust.

Mercantilists can solve the worldwide problem by taking down their barriers to imports and boosting the economies of their customers. But the U.S. reaction in 1929 was, instead, to increase the height of its already high trade barriers. It is unlikely that China will be any smarter today.

Your Name:

Post a Comment:

  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Nov 2021
    Oct 2021
    Sep 2021
    May 2021
    Apr 2021
    Feb 2021
    Jan 2021
    Dec 2020
    Nov 2020
    Oct 2020
    Jul 2020
    Jun 2020
    May 2020
    Apr 2020
    Mar 2020
    Dec 2019
    Nov 2019
    Oct 2019
    Sep 2019
    Aug 2019
    Jun 2019
    May 2019
    Apr 2019
    Mar 2019
    Feb 2019
    Jan 2019
    Dec 2018
    Nov 2018
    Aug 2018
    Jul 2018
    Jun 2018
    May 2018
    Apr 2018
    Mar 2018
    Feb 2018
    Dec 2017
    Nov 2017
    Oct 2017
    Sep 2017
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015
    Jun 2015
    May 2015
    Apr 2015
    Mar 2015
    Feb 2015
    Jan 2015
    Dec 2014
    Nov 2014
    Oct 2014
    Sep 2014
    Aug 2014
    Jul 2014
    Jun 2014
    May 2014
    Apr 2014
    Mar 2014
    Feb 2014
    Jan 2014
    Dec 2013
    Nov 2013
    Oct 2013
    Sep 2013
    Aug 2013
    Jul 2013
    Jun 2013

    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term

    Environmental Regulation
    Last 100 Years
    Real Estate Taxation

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • Votersway Blog
  • Watt's Up With That


  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]