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Yields

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Everyday, people ask me where interest rates are going and what yields will look like six months or a year from now. This is one of the reasons that I published our internal forecast this year. In our 2010 Economic and Investment Forecast, I stated that I thought short term rates would stay low and that long term rates would move higher.

The rationale for this is that the Fed will want to keep short-term rates low so that the financial system can borrow at a low cost and use those funds to invest (in loans or bonds) at higher rates. The wider the spread between the two, the more the banks earn. The more the banks earn, the more capital they will be able to grow through retained earnings. And capital growth is key to the health of the financial system given the huge write-offs from the subprime idiocy.

In the chart above, I’ve included yields across the spectrum, from one month to thirty years. What you can see from this is that year-to-date, short term yields have actually fallen but long-term rates have moved higher. This fits very closely with our forecast and we anticipate that this tilting upward of yields in favor of longer-term yields to continue.

I’ll periodically publish this chart for you to review so you can keep track of the changes in yields.

Sorry for the audio quality on this one, but its one of my favorite songs and the video of the band was the best in spite of the audio.

Mark