Greek Default, Puerto Rico Debt Service Problems to Have Little Effect on US Rates

Greek Default, Puerto Rico Debt Service Problems to Have Little Effect on US Rates

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Greece lies on the brink of collapse. Puerto Rico debt obligations are all going to be restructured. Even if the worst case were to materialize (both default), US interest rates are not headed for a dramatic decline or even a retest of recent lows. They are headed up.

The news is pretty bleak, but I still don’t believe that Greece will default.  I certainly do not believe that Puerto Rico will default.  In Greece, the institutions that hold these bonds (now German banks and US hedge funds) are too sophisticated to force a situation where they receive nothing, than to allow a situation where they recover a restructured bond.   The voting electorate is also too smart to vote for a continuation of the utter chaos they will see this week.  Same will be true in Puerto Rico.  Everybody will back away from the brink. These places are simply not analogous to Russia or Thailand in 1997, or Argentina more recently.

If we were to see a Greek default, there will be increased dislocation and volatility in the equity and debt markets.  The reality however remains that Greece is such a small part of the European economy, it will not have a major impact on anything.  Austerity in Europe will probably continue, but the US will continue its path towards pulling out of the low interest rate environment that we have been in.  In short, Greece is just to small and inconsequential and events there are not going to cause the rush to safety in the US that would drive long term bond yields back down.

I predict that interest rates will continue to rise towards a more normalized level with Janet Yellen and the Fed still on track to raise interest rates in September or October.   The 10 year Treasury will end the year closer to 3% than to 2% and savings rates will continue to move up gradually.  The bond bubble will begin to burst and this is a good time to favor cash over bonds.

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