Sunday, July 28, 2013

What Rising Interest Rates in the US Mean For Trinidad & Tobago

US Treasury Yields which form the basis of interest rates in the US are at all time lows which means two things:

1. Rates can't go much lower and

2. Rates are likely to rise. 

In reality however there is way more upside to interest rates compared to its scope for decrease. Especially given the bleak economic outlook of the US and perpetual rounds of money printing (Quantitative Easing) to the tune of at least $85 Billion / month. 

Although this is being done by the Federal Reserve to suppress interest rates it only serves to create inflation (though latent at the moment) and inflation necessitates higher interest rates to compensate lenders for the loss in future purchasing power. 

Implications for T&T Investors

The real threat to T&T however lies in the fact that T&T is heavily overweighted in holding $US denominated bonds especially in T&T's mutual fund sector. And as interest rates rise the price / value of bonds fall. 

This basic economic reality exists because as interest rates rise a bond holder has to offer a lower price for his bonds because it now offers a comparatively inferior yield / return in terms of its value. This will have severe effects on mutual fund Net Asset Values (NAV) in T&T. 

Investors are therefore advised to enquire with their respective mutual fund investment houses to determine how heavily weighted their investments are in $US denominated bonds. Interest rates have already began to creep up and it's the elephant in the room investment advisors don't want to talk about.

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