Friday, August 17, 2007

How Now Brown Cow?

In today's Financial Sense Market Wrap, market commentator address the issue of whether the long term interest rates are heading higher. Conclusion: Long Term Interest Rates are Heading Higher

  • The recent market selloff was accompanied by a flight to the safety of Treasuries. Stocks down, bonds up – recently we’ve seen this seemingly day after day. However, it is important to note that in spite of this short term action, the long term trend in long interest rates has changed from down to up. Even though rallies in the bond market (interest rates lower) have been sharp and convincing, the long view supports the conclusion that long term interest rates are heading higher. One technical chart supporting this conclusion is illustrated below. Upward trending interest rates that occurred in the 1960’s finally topped in 1982. High rates of inflation accompanied the rising long term trend in interest rates. The secular bull market in stocks began in 1982, and this generally corresponded to the start of a long interest rate downtrend. Stocks bottomed when interest rates topped. From 1982 until recently, there was an active downtrend in long term interest rates; however, the trend of lower interest rates is likely over, and long term interest rates are likely in a young secular uptrend.

    Below is a weekly chart of the 10-year Treasury note yield from 1990 to the present. The bottoming of interest rates in mid-2003 was followed by a series of higher highs and higher lows shown on the right hand side of the chart. In spite of the current bond market rally caused by an apparent flight to safety, this was only sufficient to produce a settling back of interest rates to the 2-year (104 week) moving average (thus far). This “flight to safety” appears only as an insignificant tick in the far right side of the long term chart.

    Similarly, the 30-year Treasury note yield is illustrated below. The top annotated line simply connects the important interest rate highs, and the bottom line connects the important lows. It is apparent that the highs have leveled out, and the lows are now trending higher. Conclusion: The long term trend of long interest rates is higher. What would invalidate this conclusion? A decisive break of the trend of higher lows in the 10-year note yield (above chart), or a decisive break of the trendline defined as higher lows beginning in mid 2005 (below chart).

And the chart below says a thousand words!!!!!!!!!!!

Here's another article that's worth reading: Financial System in Jeopardy