The Fed and Rates: Your Valuable Opinions are Needed

[Pa(b)st Prime]

What truly strange times these are. The entire Treasury curve sit's below the Fed's 5.25% overnight lending rate.

Conventional wisdom say's that the market is then anticipating cuts in the Funds rate if it's willing to lend money cheaper further out than overnights. How can this be? Is there not a greater threat of runaway inflation at this moment than any other time in the past decade? Or is the Treasury market saying this is circa 1999?

Friday's 10 year note yield is now back to being only a whisker under the 5% benchmark. Please state your opinions.

 

[nazzdack]

The Fed can "control" the target rate for Fed Funds but it can't control the entire yield curve. Also, the entire fixed income sector is "overbought" because of excessive speculation. A lot of excess liquidity has been diverted into long-biased strategies that seem to prop up the market.

 

[crgarcia]

About 5% flat.

But be aware that nobody (not even Ben Bernanke) can forecast the future.

In my opinion after the summer, bond yields may go a bit down to flat 5%, and the stock market will recover a little.
Altough it remains to be seen if we see a correction of 200-400 points during this summer.

Even with such a correction the indexes might end the year with 6-7% profits.

 

[trefoil]

I voted for under 5 rather than under 4.5 by year end, but only because there's only half a year to go.
In actuality, a linear regression drawn on the log of the yield of the 10 year since 1999 lands you at 4.14%, which is well under 4.5, of course.
I believe we'll land at that mean, but in 2008, not this year.
As I noted in another thread, the 13 week bill's yield has been declining <i>all year</i>. If inflation were really the threat so many people on this board seem to think it is, that would not be happening.

 

[dhpar]

Quote from trefoil:

I voted for under 5 rather than under 4.5 by year end, but only because there's only half a year to go.
In actuality, a linear regression drawn on the log of the yield of the 10 year since 1999 lands you at 4.14%, which is well under 4.5, of course.
I believe we'll land at that mean, but in 2008, not this year.
As I noted in another thread, the 13 week bill's yield has been declining <i>all year</i>. If inflation were really the threat so many people on this board seem to think it is, that would not be happening.

I don't know what you are taling about. T-bills are the least sensitive to inflation and reflect better demand for near cash. This much better correlates with Oil as oil money often flow to near USD cash.
Regression? what regression? you can pull out anything from your finger depending on timeframe you use.

I vote for 5.3%. We need much more liquidity contraction to send bonds (and stocks) lower. At this time it is all rosy...but time for short bonds is around the corner again....

 

[trefoil]

You could run a regression from the start of the bull in 1981 too. Guess what? Shows almost the same thing.
The trend in yields is still in place, and it's in place almost regardless of the timeframe you use, excepting the most recent. The current runup is hardly the first to occur during that long trend down. Whether it's the last before the trend finally turns up, I don't know. I do know that the odds are with the trend continuing.

 

[Pa(b)st Prime]

Quote from nazzdack:

The Fed can "control" the target rate for Fed Funds but it can't control the entire yield curve. Also, the entire fixed income sector is "overbought" because of excessive speculation. A lot of excess liquidity has been diverted into long-biased strategies that seem to prop up the market.

All true but Greenspan was great for saying the market made him do it. It's hard to argue that Treasury prices are warning Bernanke that he needs to bump o/n's.

Or is it possible that Asian/Oil buying has artificially inflated debt prices? In that case is there a disconnect between what the market is saying and what vigilant, inflation fighting policy makers should be voting?