Interest Rate Roundup

Friday, July 07, 2006

Catching the turning point

I haven't been shy here talking about why rates should continue to rise for now, both here and abroad. But let's state the obvious: They won't rise forever. Long-term Treasuries will EVENTUALLY be a "buy." Inflation will eventually cool and the broad economy will eventually slow.

So how do you catch that turning point? How do you know when we've tipped from an "easy money/ever expanding liquidity/higher inflation" environment to a "tight money/contracting liquidity/deflation" environment? I wish it were easy. But it's not like someone rings a bell. Some key indicators I watch:

* Economic data -- particularly the higher frequency stuff like weekly jobless claims and money supply growth figures.

* Risk spreads -- The spread over Treasuries of high-yield bonds, subrpime mortgage bonds, etc. Are they blowing out, indicating a reduced appetite for risk?

* Stock and commodity prices -- Are these pulling back? If so, it could be a leading indicator of cooling price pressures.

* Chart patterns -- Are we seeing double tops in Treasury yield charts? Are the weekly downtrends in long bond futures or Eurodollar futures turning up?

So far, nothing convincing on any of these fronts. But you can bet I'm watching.


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