Interest Rates in U.S. Set to Rise
Two weeks ago the U.S. Treasury bond market gave us a key reversal, which was confirmed this week with prices again closing below the previous weeks low — see chart below. Treasury bonds and notes represent interest rates and have an inverse relationship to interest yields. If the price of T-bonds, T-notes, or T-bills go up then interest rates go down; if the price of T-bonds, T-notes or T-bills go down, as we’ve seen over the last two weeks, then interest rates go up.
A continuation of the current 2-week trend in Treasuries would be welcome by many market watchers as it would signal that financial markets are finding themselves on more solid footing and in less need of the massive intervention that central bankers and government agencies have provided over the last 8 months.
Nothing frightens global investors more than successively higher U.S. Treasury bond prices, as it indicates that institutions are opting for the safety of U.S. Treasuries over other asset classes. When the flow into U.S. Treasuries becomes too strong, as it did in the last quarter of 2008, it creates a vacuum with no money left to support other markets. Much of the government intervention we saw over the last 8 months was geared toward ushering money out of treasuries and back into the market place in the form of stocks, currencies and other asset classes. Central Bankers hope for more normalized money flows in the markets going forward; in contrast to the one way trade we have seen of late with so many markets, currencies amongst them, displaying the manic price pattern of commodities, where prices swing wildly from an oversold cycle to an overbought cycle.
Jay Norris
www.trading-u.com
DISCLAIMER: Futures, options and Forex (off-exchange foreign currency futures and options, or “FX”) trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures, options and Forex may fluctuate, and, as a result, clients may lose more than their original investment.