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"When interest rates increase, it’s going to leave many Canadians in greater financial difficulty.”
The long-awaited liftoff is here: the U.S. Federal Reserve has announced they are raising the Federal Funds Target Rate to 0.5 per cent. It is the first time in seven years the Fed has increased their trend-setting interest rate, which they cut to 0 per cent on December 16, 2008. Markets had widely anticipated the move, with 81 per cent calling for a hike today. As the U.S. is the largest economy in the world, any change it makes reverberates through the rest of the globe, impacting markets and even the cost of borrowing for other countries.
The seeds are already planted for bond yields to climb over the long-term as we lose the traditional investors in the U.S. debt market. One way out of this dilemma is to get deficits under control and put debt (and debt/GDP ratios) on a more sustainable trajectory. If preventing a return to double-digit bond yields (and mortgage rates) in North America isn't a big enough motivation to do this, I don't know what is.
Depending on one's perspective, 2011 will be viewed as disappointing, bordering on terrible; or, it will be looked back on as a year where we should be thankful. Investors were brought face to face (finally) with the reality that solving the 2007-08 housing and credit crisis merely kicked the can down the road to the next bus stop; that being government debt.
Despite the hysteria that the downgrade of US debt would lead to US funding costs rising and Treasuries crashing, instead we've had stocks crashing and Treasury prices rising sharply. That'
Flickr: Ryan Tir
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