Friday, August 6, 2010
Rates are breaking lower, dropping below 2.85% on the ten-year basis. As the chart above shows, the recent levels were holding but a break through now shows that we can expect the 10-year rates to test the 2.0% level.
The stock market continues to remain at relatively high levels even though interest rates, another barometer of the economy, languishes at lows, continually making new lows.
As long as the Fed keeps rates down to zero, the bank arbitrage between the cost of money 0% and guaranteed income Treasuries will continue. It now becomes a no-brainer that rates will continue to fall and we will drift into the dreaded DEFLATION!!!!
I reviewed my notes from 4 years ago and the economy was weak, unemployment was rising and interest rates were falling. We were coming off of 5% on the 10-year. What a bond market rally! It is the mother of all bubbles. I guess you've got to be long the bond market. There is little hope for our economy at this point, not until we have a new administration.
Will we get to the point when the dollar is so devalued that interest rates will have to rise? On no, at that point, the Federal Reserve will step in and buy the Treasuries.
One thing for sure, if the interest rates ever do rise, it will probably cause another economic disaster for the banks as well as countries that continue to pour into Treasuries at miniscule rates. When are we ever going to get our economy together? Is there any hope???