It's Just a Matter of Time ...

for US interest rates to go up ... a lot.

They are below equilibrium levels versus long term core inflation of 2%. And the supply is huge, a tidal wave of huge Treasury auctions as far as the eye can see. Corporate and mortgage competition is low due to the weak economy. What will have IF house sales grow to normal levels ? Demand for mortgages will grow precisely when the Fed is no longer a buyer, but is a seller.

The competition from corporations and households for loans is very weak. Household debt levels keep dropping. Banks flush with excess reserves put the money in T-bills and short term Treasury notes. When their customers start to want money - and when the economy is obviously stable so banks will be willing to lend - that source of demand will vaporize.

Foreign buyers have gotten a good return lately as the dollar strength gave them a bonus. But soon the dollar will stop going up and those buyers will face losses IF the dollar resumes its long term decline.

Yesterday's auction showed some weakness - WSJ: "A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market."

Maybe the calendar in Japan caused the drop-off. Or may it was the derivative market - WSJ: "Adding to the focus on the Treasury market's woes this week has been an unusual development in an important, but usually ignored, market: interest-rate swaps. These common derivatives entail contracts that typically involve trading one stream of interest income for another. And in the past week, investors are being paid more to own U.S. Treasuries than U.S. corporate bonds."

Why does this derivative market exist ? It's just a casino for hedge funds and banks to pits trading skills against each other. It serves no useful public purpose. And it can impact the "real" market for bonds. Get rid of it NOW.

The huge tidal wave of governmental demand for debt in the US will soon run into natural demand from a stable economy. That collision will cause trouble for the stock market, in my humble opinion.

Hence my neutral - bearish intermediate term outlook until that rate rise gets priced in.

Word of the Day

"Trenchant" - adjective [$10]
Trenchant means 1. lean, incisive (a trenchant comment); 2. forceful, effective and vigorous; 3. caustic, cutting (trenchant criticism); distinct, clear cut.
Sentence: Writing a trenchant blog every business day is not easy; a lack of ideas occasionally occurs and then ... I wing it.