Interest rates are another area of concern to us. We think the big surprise this year may be that contrary to popular thinking, rates are finally set to rise. The public and most of Wall Street is still expecting the Fed to cut rates, probably multiple times, this year. That may happen (although we don’t think so), but we think there are reasons to be concerned about long term rates regardless of Fed activity. One of the major buyers of long term Treasuries over the last several years, in addition to the Chinese, are the oil states which have reinvested the windfall from higher oil prices into the Treasury market. If oil prices continue to fall these states will have less buying power and the reduction in marginal demand could have a detrimental effect on Treasury prices.
Funnily enough the Wall Street Journal has an article about this today:
With crude prices retreating, oil producers will have less wealth to spread around the world. That should mean lower energy prices and lower inflation, but not necessarily a drop in long-term interest rates.
Click here to read the rest of the article.