Introduction to Financial Markets - Forecasting interest rates Essay

Introduction to Financial Markets - Forecasting interest rates - Essay Example Interest rates, according to the Financial Times , have fallen back to the historic lows, permitting companies, individuals, and some countries to borrow loans at a price lower than before. Contrary to this, households and the extensive economy still fight back in the wake of credit stagnation. The relationship between these two forces, that is the stimulating impact on economic operations of low borrowing prices and the damping impact of a liability squeeze has adverse repercussions for investors globally, from those individuals who save on their own to the world’s largest insurance companies (Aline, Mackenzie, & Milne, 2010). For the past couple of years, following the 2008 collapse in equity markets as well as in a hysterical serach for â€Å"secure† investments, more cash has been poured into bonds as compared to earlier times. Bonds from the U.S Treasury debt to upcoming market corporate bonds have been performing amazingly well, being ranked among the possessions around the world that have generated the largest returns in 2009 and 2010. On the other hand, if the descending trend in rates were to come to an end, then there may be an abrupt halt to the rally in bonds. In the same way that falling interest rates raise the bond prices paying flat rates of interest, increasing rates eat into their value and push costs lower. It is noted that when the interest rates rises, bond holders and bonds funds are likely to undergo losses. In fact, in the near future, it is expected that borrowing rates may fall even lower. At the time when the article was written, the Federal Reserve was planning to buy government bonds with the only aim of pushing interest rates lesser (Aline, Mackenzie, & Milne, 2010). The issue to focus on in this section is that, even after extra two years of close to zero official rates and large quantities of stimulus spending, big economies like the United States have not grown as strongly as they expected. This is the reason why t he Fed is planning to start its â€Å"quantitative easing† despite the fact that there are many investors and economists who doubt that it will have a powerful impact on economic growth. The Fed is making interest rates low, which means inflation and decreased bond yield, seeming like a bubble. The factors likely to have an impact on future interest rate movements An interest rate can be defined as the quantity of money received in connection to a loan, generally stated as a ratio of dollars obtained for each hundred dollars lent. From the credit markets review in the section above, there are factors that may affect future interest rate movements.   First, the U.S economy is an important player in this section. When it grows, consumers get employment and thus get some investments to lend through banks, though they must also borrow to purchase big items like cars or homes, or to fund other properties by using credit cards. For instance, Lieb, in the article claims that he ha s never experienced such inexpensive borrowing rates on housing loans. This means that when the funds’ demands drop, interest falls. In contrast, when funds’ demand increases, there is a rise in interest rates, acting as a