Tuesday, April 14, 2009

Are Interest Rates Bottoming?

Poor Retail Sales Hit Rates
Gary Lewis
Asset Design Center

After weeks of optimism over improving bank earnings, reality slapped investors back to reality with worse-than-expected retail sales numbers in March. Interest rates, which had been climbing prior to the data's release dropped sharply as sales numbers came in at minus 1.1% instead of the plus 0.3% that economists were expecting.

I had mentioned two weeks ago that while I expected rates to rise sharply, there would probably be one pullback. We had sold short put options and bought call options in anticipation of this move.

With rates dropping down to 2.81%, and June 10-year notes rallying to 123-14, I covered the short puts and sold the long calls. The position is now bullish for rates and bearish for the Treasury Notes.

As you can see from the chart above, while we didn't realize the three week test of the low, we could be none-the-less finding support at the trend line shown in red. The week is still young though and how this chart will look at the end of the day on Friday is anyone's guess. Perhaps I am early with my position shift but with more bank earnings and other data due out the rest of the week, markets could turn in an instant and move sharply.

We see this morning that Goldman Sachs earned billions of profits in it's last reporting period. With all of the money that the government has pumped into banks and all of the losses that were avoided by AIG paying off banks such as Goldman Sachs in full, one has got to expect some spectacular earnings numbers coming out. Strong numbers SHOULD reflect in higher interest rates UNLESS the market sees through the market manipulation. Still though, the charts indicated that rates should move higher. Whatever news will drive this is anyone's guess. Perhaps in the end, too much additional government debt will come home to roost and investors will demand more return to compensate for the increasing risk.

No comments:

Post a Comment