Making Sense of the Two Week Spike In Interest Rates
This morning Barry Ritholtz put up a post on saying that bonds are oversold on sentiment and technicals if not valuation.
In that post, he links to an article by Barron’s interest rate columnist Randall Forsyth, “It’s For Real: Bond Yields Were Too Low” (subscription required). Forsyth writes:
What’s behind this battering in bonds? The usual suspect that has been rounded up by the press is inflation. But that doesn’t square with the facts….. gold is down, as are industrial metals, while the dollar is firmer, all disinflationary signs.
Add in the fact that government reports of inflation (PCE (see pg. 13, Tables 9 and 11 for the PCE data), CPI and PPI), whatever they’re worth (not much in my opinion but the market seems to respect them), have been tame of late.
Instead, Forsyth cites evaporating expectations for a Fed rate cut (see also “Did Anybody Actually Read Bernanke’s Speech?”, Top Gun FP, Tuesday June 5 – this is the speech that really seems to have triggered a major recalibration of Fed expectations though I have no idea why) and decreased treasury buying by foreign central banks.
Add in rising interest rates around the globe (“One Important Reason for the Rise In Interest Rates: Rising Rates Around The World”, Top Gun FP, Mon June 11) and a bout of panic selling as the 10 year broke through technical resistance at 5% last Thursday (“Interest Rates Explode Upward – Biggest One Day Spike Since March 9, 2005”, Top Gun FP, Thursday June 7) and I think we’ve covered the essential factors that caused the major bond sell-off the last couple weeks.
UPDATE (Sat 6/16, 8:30am PST): In his weekly Barron’s “Current Yield” column, “Fed Up: The Central Bank Is The Real Reason Rates Have Headed Skyward” (subscription required), Randall Forsyth writes:
…. the essential reason for the back up in bond yields was the market’s recognition that the Federal Reserve isn’t about to lower its overnight federal funds rate target from 5.25%…..