Wednesday, April 29, 2009

Rates Rise as Fed Meets

Ten year note rates surged to close above the 3% level yesterday spurred on by improving consumer confidence and housing data. Rates may continue to rise following today's report on 1st quarter Gross Domestic Product (GDP). Analysts predict that the economy might have shrunk 4.7% last quarter. An improvement over the previous quarter's -6% decline.

Markets have been reacting positively to recent economic data releases even though the numbers are still very negative. For example, yesterday's Case-Shiller report on real estate prices showed a year over year drop of 18.6% based on February figures. Business news analysts claimed that investors were encouraged that the rate of decline may be slowing. January's figure showed a 19% year over year decline based on a ten-city index.

The government's debt auctions continue to go well. Despite the massive amounts of debt the US is incurring, Treasury Bill, Note and Bond auctions continue to be over-subscribed. The dollar has remained strong in world currency markets.

With all of the cross currents in the news, trying to make decisions on future rate moves based on fundamentals proves to be difficult. On one hand, the economy still appears to be very weak. The potential damage that the Mexican flu can cause to the world economy weighs in favor of lower rates. However, the ever increasing US government debt levels should add to higher rates.

Technical analysis however indicates that pressures are building to push rates higher. Rates have been continually falling for years though. The recent monthly test of the lows may prove to indicate that this exceptionally long termed move may have finally come to an end.

Don't ever lose sight of the market truism, "Markets can remain irrational much longer than investors can remain solvent."

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