Blame the Europeans for Increasing Rates

My wife grew up in Europe so I am pleased to blame the rise in interest rates on her. Actually, I’m serious; there are hints that the European central banks are going to raise their version of the federal funds rate. That sent interest rates up here. There are also other factors, such as the Federal Reserves Beige Book showing that the economy is strong. Anytime a high profile report says the economy is strong rates are bound to rise.

If you’re not sure why this is, think of it this way. When the economy is growing and things are going well, then there is always the fear of inflation. Bond investors don’t like inflation, since it eats directly into their future earnings. Hence, bond values go down in reaction to this fear of inflation. When this happens then the yield on bonds goes up, causing interest rates to go up.

This is of course a very simple explanation, there are scientists and really learned folks out there that are spending their lives trying to develop models to better understand market fluctuations. However, regardless of what they say, the fundamentals remain the same.

I get off track. In summary, the note for this week is blaming the Europeans. I suggest you not celebrate St. Patrick’s Day in protest. I say you celebrate Abe Lincoln Day instead! I guess that isn’t happening any time soon.

Got questions? E-mail me. I would love to hear from you.

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