Cautious Considerations Amidst Economic Changes

​Hello, it's me. Today I want to share with you my opinion about the current economic situation and how it affects all of us. As you know, inflation has ceased to be the main economic concern; now the primary economic concern is the level of long-term interest rates, those extending beyond 10 years. Moreover, their upward trend has gained new momentum. We have set aside concern for inflation for a very simple reason: because, as you can see, the maximum basic inflation, the underlying inflation, has reached a peak and it's most likely that it will continue to decrease over the next months.
​Now, what truly worries us is the level that long-term interest rates have reached. It gives the impression that they have reached a critical level, above which stock markets could experience significant setbacks, and the economy could be seriously damaged. To give you an idea, the interest payments on the US public debt currently represent 3% of GDP, which is staggering. But if you bring it down to the individual level, for US residents seeking a mortgage, the interest rate they are charged is 7.5%, another staggering figure. And this is on top of the 21% they are charged for outstanding credit card balances. Therefore, it's clear that we have reached a critical level of interest rates, above which the FED will most likely not allow them to keep rising.
However, I am making this up. Because at the moment, the trend of the yield on 10-year and 30-year bonds is clearly upward. And why is that? Very simple: if you take into account the reduction of the FED's balance sheet. We have seen that the FED has reduced its balance sheet, meaning it has allowed the public debt it held to mature, in such a way that this debt has matured and has withdrawn liquidity from the system. Withdrawn from the system due to debt repayment.
This means there is less money available to buy bonds, and therefore bond prices drop, leading to higher yields. This effect adds to the impact of the rate hike that the FED has already announced for this year and the next. So, we have an explosive combination: reduced demand and increased supply of bonds, causing long-term rates to soar.
And what are the consequences of this for us? Well, they are numerous and very negative. On one hand, it raises the cost of financing for companies and the public sector, which reduces their investment and growth capacity. On the other hand, it negatively affects the value of financial assets, especially stocks and investment funds, diminishing our wealth and savings. Lastly, but not least, it reduces consumption and aggregate demand, slowing down economic recovery and increasing the risk of recession.
What can we do in this scenario? Well, not much, to be honest. The only thing we can do is pay attention to the signals that the market sends us and adjust our financial strategy accordingly. For instance, we can reduce our exposure to assets that are sensitive to interest rates, such as stocks or mixed funds. We can diversify our portfolio with assets less correlated with interest rates, like gold or cryptocurrencies. And we can seize opportunities that arise in the secondary bond market by purchasing those that offer attractive yields and manageable risks.
We are facing a complicated scenario for the economy and our personal finances. However, there's no need to despair or panic. We need to stay informed, be cautious, and seek out the best options to safeguard our assets and make the most of our money.
I hope this article has been helpful to you and has cleared up some questions.