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By G. Steven Bray
Interest rates are benefiting from the “flight to safety” trade. As equity and commodity markets crater, investors are seeking the safety of bonds, which pushes interest rates down.
The funny thing is the bond market seems to be a reluctant recipient of this largess. The S&P 500 is down 200 points since Dec, and oil is trading at prices not seen in over a decade. Yet, 10-year bond prices are stuck in the same range where they’ve traded for months, albeit at the lower end of that range. This suggests that if not for the collapse in other markets, interest rates would be rising.
I mention this to keep you cautious. While US economic data still paints a mixed picture, the sentiment seems to be that the economy is supposed to improve. (Otherwise the Fed wouldn’t have raised short term rates, right?) And an improving economy portends higher interest rates.
Frankly, it’s a messy picture right now with many factors at play. The headline number in last Fri’s job report was surprisingly strong, which pundits used support the rosy economic sentiment. However, look past that number, and we find weakness. 40% of the new jobs were to people in the lowest age brakcet (read low paying service jobs) and wage growth again was non-existent (read no inflation pressure). This week brings the Christmas retail sales report and record corporate bond issuance. This is likely to keep rates volatile and unpredictable.
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