Wednesday, June 13, 2007

 

1994



The chart to the right is a weekly bar chart of the 10 year Treasury Note futures. Given the drastic run up in rates starting in May I am beginning to wonder if we are not experiencing a meltdown similar to what happened in 1994. That bond bear market was the result of historically low yields (for the time) which lowered credit spreads. It looks like people have been reaching for yield recently. Reaching for yield means they are buying lower quality/higher risk debt instruments in order to receive a higher interest rate. To be honest, I was caught off guard by this because I had expected interest rates to go lower this year because of the weakening economy. May retail sales numbers that were released today and which were higher than expectations show that the economy might not be as weak as previously thought. Today saw a dramatic spike higher in rates (lower in prices) and then a reversal which isn't surprising. Rates have moved a long way in a short time and we are near some resistance levels. (Look at the previous lows to the left.) I'll keep an eye on this but if we are in a credit crunch then expect rates to keep going up. None of this will be good for the economy or the stock market going forward but right now the party is still on.

Is wave 4 in? Maybe. I think likely. Soon, I owe you a look at the big picture in the stock market which will put this small graph into perspective and should make you realize that it matters very little because we are near the end of the bull that runs back to the beginning of 2003. But until that time, the trend is still up. And if wave 4 is over we are in for one heck of a rally.

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