Interest Rates

Long treasuries moved higher during the first half of July buoyed by favorable June inflation numbers and generally weak economic signals. However, most bond prices did an about face in the middle of the month.

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Yields remained in a narrow trading band in early June, as investors braced themselves for another volley of ominous PPI and CPI announcements. But, upon release of May's surprisingly good inflation numbers, the bond market began a steady march upward for most of the remainder of the month.

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With today's interest rates at the lowest levels in more than two decades, the “Real” Interest Rate Theory is being used as a bullish argument asserting rates may move lower. Although this may be the case, we feel it timely to print Steve's outline highlighting the problems associated with this concept.

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It's a tradition. Each January we publish the gold book (Perception II) before this green book. So don't blame the post office.

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My current view towards long bonds from an institutional investor's point of view is to sell some now and sell some more when longer term momentum slows.

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The perception nearing November could well shift to a view that the differences in the two parties approach to the world will have an impact on interest rates.

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Today, T-bills are yielding 3.20% and high quality commercial paper is yielding 3.40%. It may be useful to examine these rates in a historical perspective. Some may think these are just about the lowest short term rates in U.S. history. Well, not quite.

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June was a rather steady dull month in the bond market but there was a pre-4th of July explosion on the upside as bond market grave dancers cheered the stunning jump in unemployment.  

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The bond market, helped out by some good CPI and PPI numbers, scored typical net gains of 2+ points in May. Long bond yields, corporates, treasury zeros and treasury coupon bond yields fell 20 basis points....all in all, a pretty good month.

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The bond market continued to edge higher in the first part of April, but then the Chicago River drained the T-bond market of its liquidity, flooding out T-bond and T-note futures trading.

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October drama…Interest rates and stocks may be uncoupling…Is it too soon to see a bear market?...What could break the back of the Bull?

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The concept of a “real” rate of interest is widely held, but it does not appear to be a natural law. It is not a truism that has prevailed forever. Like many investment concepts and theories, sometimes it works and sometimes it doesn’t.

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After a 300-point move in the DJIA in a little over two months, a number of observers view the market as “overbought”. However, we see no significant evidence among our indicators that supports this opinion.

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Forget about the economy, forget about the uptick in the CPI, and forget about the bulge in bond supply. U.S. interest rates rose in November because the dollar went down.

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Have we entered an age of interest rate discontinuity, where past interest rate history has no meaning? Are the current high rates merely a long-lasting hangover from the high inflation of the late 1970’s and early 1980’s? Is it a matter of there being too much of a demand for dollars and not enough supply? NO!

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In this business, it is often best to conveniently forget what was said in the past. But unfortunately, when the opinions are written down and published, this does not always work. At any rate, this publication has a sometimes embarrassing commitment to full disclosure. So again, we will include our old (1986) crystal ball gazing right along with this year’s predictions.

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Ruminations from “The Road” – Recent visits and client lunches in New York, Philadelphia, Baltimore and earlier in San Francisco and Seattle have played an important part in what follows… Playing Interest Rate Politics – Polls were taken at our two June luncheons in New York to see what impact our guests thought a move in interest rates, prior to the November election, might have on the stock market.

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If a manager has the freedom to buy bonds, there does not seem to be much reason to buy interest sensitive equities as a strategy unless there are other positive factors. Tables in this section demonstrate why. However, if you can’t buy bonds the next best thing is buying high yield top quality utilities with minimal nuclear exposure, as close to a bond proxy as you can get.

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