Rising Bond Yields (or, The Magazine Cover Indicator Lives!)
Chart courtesy of stockcharts.com
>
A few months ago, we noted (with an "Uh-Oh") that Business Week's February 19, 2007 cover story was on our "Low, Low, Low, Low-Rate World" (for more on the magazine cover indicator, see this).
So far, the timing is of the indicator has been rather typical: Rates ticked down, hitting their nadir (4.48%) a ~month after the cover story appeared. Its been nothing but up since then: Yield on the 10 year bond reversed course rather dramatically. From that sub 4.5% trough, the yield on the benchmark note is now at 4.94% -- the high point for the year. The 10 year yield has not been over 5% since August 2006.
Here is a quick overview as to why yields have moved up -- and are likely to keep going higher:
2. Overseas Economies are Robust: Ahead of the Tape columnist Justin Lahart notes that "Overseas economies have remained strong despite the U.S. slowdown. That has stoked inflation worries abroad, which in turn is helping to push interest rates higher and keep pressure on central banks."
3. Rate Cut expectations are dramatically lower: Fed Fund futures are only forecasting a 50/50 chance of a reate cut by year's end. As recently as March, the Fund Futures were anticipating at least three 25 basis interest-rate cuts from the Federal Reserve.
4. Fed Fund rates could be going higher: Bloomberg noted that "Options on Federal Fund futures at the Chicago Board of Trade indicate a 41 percent chance the central bank will lift its target rate for overnight loans between banks to 5.5 percent from the current 5.25 percent, according to data compiled by Bloomberg. A month ago, they showed no expectations for an increase."
5. Diversification Away From US Treasuries and Dollars: The Chinese are seeking ways to diversify their $1.2 trillion in foreign reserves; Middle Eastern Oil Countries are doing so also; Japan may soon follow. Most of these regions (Asia, Europe, Middle East) remain net purchasers of U.S. Treasurys, but at a somewhat slower rate. It doesn't require heavy selling to push yields higer, merely slowing the purchases of our massive debt sends yields upwards.
6. Political Blowback: As the G8 summit takes place, we might as well admit the elephant in the room that too few people have acknowledged: The US ain't very popular around the world these days. Some countries have used that opening to move away from the dollar as the world's reserve currency. Its a small smack at the US and its unpopular President. Of much greater concern than petty payback, it isn't too hard to imagine some point in the future where Oil or even Gold is priced in Euros - THATS a situation with grave consequences.
>
Sources:
Five Reasons: Rising Bond Yields
David Gaffen
Marketeat May 23, 2007, 3:37 pm
http://blogs.wsj.com/marketbeat/2007/05/23/five-reasons-rising-bond-yields/
Look Overseas For Why Rates In U.S. Are Up
Justin Lahart
WSJ, June 5, 2007; Page C1
http://online.wsj.com/article/SB118100620692124512.html
Fed Faces Pressure to Raise Rates, Options Show
Daniel Kruger
Bloomberg, June 4
http://www.bloomberg.com/apps/news?pid=20601068&sid=az3bgEAXzcf8&
Tuesday, June 05, 2007 | 06:35 AM | Permalink
| Comments (23)
| TrackBack (3)
add to de.li.cious | digg this! | add to technorati | email this post
TrackBack
TrackBack URL for this entry:
https://www.typepad.com/services/trackback/6a00d8341c52a953ef00d8357cb70869e2
Listed below are links to weblogs that reference Rising Bond Yields (or, The Magazine Cover Indicator Lives!):
» Opening Bell: 6.5.07 from DealBreaker.com
Krispy Kreme's Loss Widens (WSJ) Krispy Kreme donuts are awesome, no doubt about it, but apparently the business model for selling them is broken. You can't make a buck selling 'em. Although the company is trying to turn things around,... [Read More]
Tracked on Jun 5, 2007 8:08:31 AM
» It's A Low, Low, Low, Low Medium-Rate World from The Big Picture
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 ... [Read More]
Tracked on Jun 9, 2007 2:07:33 PM
» Breaking the Business Week Cover Curse? from The Big Picture
It's A Low, Low, Low, Low-Rate World. No, really -- it is. The yield on the 10 Year was under 4% -- briefly kissing 3.99%. This directly contradicts our prior discussion of the Magazine Cover Indicator (for more on the magazine cover indicator, see thi... [Read More]
Tracked on Nov 21, 2007 11:31:03 AM
Comments
Wall Street analysts have been rising stock ratings lately. I have found that stock ratings, clollectively, are closely associated with the direction of interest rates.
Posted by: will rahal | Jun 5, 2007 8:02:15 AM
The comments to this entry are closed.