Secret of Higher Interest Rates Revealed

January 4, 2014 Leave a comment

Secret of Higher Interest Rates Revealed

I can only imagine what the average person must think when he reads what passes for economic analysis in the daily press. Let me give you an example.

Last week, on the heels of strong economic data, the 10-year Treasury yield closed above 3 percent for the first time since July 2011. That was enough to send up flares and elicit warnings about the effect on economic growth.“Some economists are worried that higher interest rates might start weighing on economic growth,” according to the Dec. 28 Wall Street Journal. “But many investors and analysts expect little or no impact as long as future rate rises are gradual.”

OK. Got it. Or consider this: “Rising bond yields present fresh Fed challenge.” Actually, that quote was from the April 29, 2009, edition of the Financial Times, but it helps prove my point that this misplaced obsession never changes. (What also doesn’t change is my attempt to straighten people out.)

Long-term interest rates move pro-cyclically. In fact, the rise in rates generally precedes confirmation of stronger economic growth because the invisible hand (aka Mr. Market) senses an increased economy-wide demand for credit, which pushes up the price. That’s why the slope of the yield curve — the spread between the pegged overnight rate and a long-term market rate — is the leadingest of the leading indicators. A steeper yield curve is expansionary. It’s an inducement for banks to increase the supply of credit.

If the increase in long-term rates threatened the economy, you have to ask yourself: How do we ever get an acceleration in growth? In this model, higher interest rates slow growth; slow growth lowers interest rates. The Federal Reserve? Who needs it? No wonder bond traders were once considered Masters of the Universe.

(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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