The outlook for Treasuries.

One consequence of low interest rates is low returns on Treasuries. The 10 year Treasury note, for example, yields a 2% return. The CBO predicts that in two years the yield on new Treasuries will rise to 3.1%. Larry Edelson predicts that Treasuries will "crack" in the near future and start losing value. How come?

Allen Sloan of CNNMoney puts it this way: " If you buy a 10-year Treasury today at face value, the interest you receive over its life will total 20% of what you put up: 2% a year for 10 years. But if the yield is 3.2 % two years from now, you would be better off doing nothing for two years, buying the note at well below face value, and collecting 3.2% for 8 years. That would produce 25.6% over 8 years (8 times 3.2), a heckuva lot better than 20% over 10 years.
If the CBO is right and you wait three years to buy the note -- at a steep discount -- you would collect 4.1 % for seven years, or a total of 28.7 % on your money.
Unlike stock prices, which are often ruled by emotion, market prices of Treasury debt securities are ruled strictly by arithmetic. Consult a handy-dandy bond calculator and you'll see that if you pay 100 cents on the dollar for a 10-year, 2% Treasury today, and yields rise to 3.2% in two years, your note would be selling at only 91.65% of face value. In other words, your capital loss would more than offset the interest you had already collected, plus two more years worth. Your choice would be to take the loss all at once by selling, or taking it over time by collecting only 2% while other investors are collecting 3.2%."

And that is why Treasuries will "crack" and soon. That's why the FED can not let go of the interest rate tiger any time soon, at least not untill the economy improves.

There is another problem that arises out of artificially low interest rates: CURRENCY WARS. China is telling us that they are ready. KWN tells us that China has reserves that are equal to twice the value of the gold reserves of the whole world. If China moves, it can drive the price of gold sky high and drive all currencies into the gutter; all currencies that are not covered by gold. We live in interesting times.