It's A Low, Low, Low, Low Medium-Rate World

Saturday, June 09, 2007 | 11:08 AM

0708covdc_133000 I would be remiss in my duties if I failed to point out that this recent run up in yields -- fundamental explanation here -- occurred a few short months after the cover of BusinessWeek declared: It's A Low, Low, Low, Low-Rate World

Back in November, I was walking by a magazine stand in Grand Central Station when that red cover caught my eye (a lesser hue might have gone unnoticed). Its a fair rule to assume I stop and look at pretty much any magazine cover that is either bright red or has Jessica Biel on the cover.

Jessica_biel_2(As the nearby photo reveals, Jessica Biel in bright red is an automatic).

Since the aforementioned Biel was not on the cover of this particular magazine cover, it led to this post: Uh-Oh: It's A Low, Low, Low, Low-Rate World.

Other folks prefer more quantifiable basis for announcing their expectations of higher rates in public. Some rely on signs of a inflation, others choose to read the entrails of Fed meetings.

Chartist Michael Kahn, makes The Technical Case for Higher Rates in
In Barron's Online:

"The 30-year Treasury yield has moved above the 5% level to notch a 10-month high and technically, it has already confirmed the end of a 13-year trend of declining interest rates.

The benchmark 10-year yield is threatening a breakout of its own, too.

The major trend in interest rates has been down for the past three decades. This generational, or secular, move helped fuel the great bull market in stocks as corporations and equities typically do well when interest rates fall. But as the chart shows, the trendline that guided rates lower is now under attack."


Kahn suggests that itss too soon to "declare a generational rising trend in interest rates. Nonetheless, chartists still note that a major change in the 30-year yield has occurred."


graphic courtesy of Barron's


And this morning, Mike Santoli argues in The 5% Dilemma that "during this bull market of four-plus years, stock indexes have made essentially no upside progress in periods when the 10-year yield has been above 4.75% or so. Stock valuations and M&A deal premiums, in this context, will be crimped at lower rates than we became accustomed to in the prior decade."

However, do not assume that the 5%+ yields means the Bull just rolls over and dies. 

"Moving beyond the history lessons, though, there are some encouraging aspects of the markets' action that suggest that this pullback in stocks (partially reversed with Friday's rally) is probably not the Big One, so to speak.

First is the fact that rising rates, which went unnoticed for weeks, have now become overexposed as a news story and a focal point of market commentary. From the headline-commanding comments of Pimco's Bill Gross (risk of 6.5% 10-years within five years) to the popular insistence that higher rates, at last, will bring the buyout boom to its Waterloo, this cacophony hints that stocks are in the process of discounting this story.

The other key sub-surface element to the bond selloff is that it wasn't accompanied by accelerating inflation expectations or carnage in the corporate-bond arena. Market-implied inflation forecasts have remained tame, and corporate-bond yields haven't risen nearly as fast as Treasuries. Corporate-bond spreads still seem too tight to the naked eye, but they have been a good indicator of general economic risk and liquidity for stocks."

Well said, and logical. But all I can say is: "Long Live the Magazine Cover Indicator!"


UPDATE: June 10, 2007 7:37am

Note that Barron's Randall Forsyth also noticed the coincidence of the mag cover and the recent interest rate spike:

Four months ago, Business Week's cover proclaimed "It's a Low, Low, Low, Low-Rate World," and that it would stay that way. Since then, the benchmark Treasury 10-year note edged down to around 4.50% -- near the low end of its trading range over the past year -- in March before jumping to nearly 5.25% by Friday, which marked the high end. Moreover, almost all of that rise has come in the past month or so. 

John Roque, Natexis Bleichroder's technical analyst, says a close for the 10-year note above 5.25% would point to a target of 6.10%. "If yield were a stock, we'd be buying any pullback we could."

In other words, sell bonds.



The Technical Case for Higher Rates
Michael Kahn
Barron's, June 6, 2007      

The 5% Dilemma
Mike Santoli
Barron's, June 11, 2007

Global Rate Forecast: Up
BARRON'S, June 11, 2007

Saturday, June 09, 2007 | 11:08 AM | Permalink | Comments (37) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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A 10-year rate below the FFR is still pretty low. I think we're heading higher, but it's probably too early to declare the end of low rates.

Posted by: Steve | Jun 9, 2007 2:13:35 PM

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