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Global Interest Rates to Pressure U.S. Rates?

September 03, 2007

By MoneyRates Team | Money Rates Columnist

Despite the foregone conclusion on Wall Street that the Federal Reserve will lower rates continually in a bailout effort for the mortgage and banking industry, a trend this summer has been interest rate increases across the world. Global investors may meet a rate cut in the United States with less excitement as the spread between government bond yields abroad versus United State Treasury yields broadens. So while Wall Street will hail every hint from the Fed of interest rates cuts, global investors may have the final word on the actual impact on our interest rates if they decide to sell U.S. Treasuries.

MAJOR ECONOMIES AND CHANGES IN INTEREST RATES

Australia 6.50% from 6.25% (August 07, 2007)

China 7.02% from 6.84% (August 21, 2007)

Hong Kong SAR 6.75% from 6.50% (March 15, 2007)

India 7.75% from 7.50% (April 24, 2007)

Japan 0.50% from 0.25% (February 21, 2007)

Korea 5.00% from 4.75% (August 9, 2007)

New Zealand 8.25% from 8.00% (July 25, 2007)

Taiwan 2.88% from 2.75% (March 30, 2007)

Czech Republic 3.25% from 3.00% (August 30, 2007)

European Monetary Union 4.00% from 3.75% (June 06, 2007)

Iceland 14.25% from 14.00% (December 27, 2006)

Norway 4.50% from 4.25% (June 27, 2007)

Sweden 3.50% from 3.25% (June 20, 2007)

Switzerland 2.50% from 2.25% (June 14 2007)

United Kingdom 5.75% from 5.50% (July 05, 2007)

Canada 5.25% from 5.00% (July 10, 2007)

Besides the global increase in rates this summer the other major phenomenom has been the massive flight-to-quality into U.S. Treasuries by panicked investors. As witnessed in the chart below - the jump in the TED spread (difference between yields in short-term U.S. Treasuries and short-term Eurodollars) is the largest since 1987.



This phenomenom however, is one that has already begun to reverse and should not be used as a justification for lowering rates in the United States. Wall Street wanting to lower interest rates to "save the day for the mortgage industry" may be counter-intuitive to what the global markets are dictating.

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