Interest Rate Roundup

Tuesday, September 12, 2006

Falling oil and gas prices -- Bullish or Bearish for bonds?

During this entire Fed-fed asset bubble cycle, crude oil and bonds have had a complex relationship with each other. Sometimes, lower crude oil (and gasoline) prices were interpreted as bearish for bonds. The reason: They helped fuel consumer spending, and by extension, economic growth. Sometimes, lower energy prices were interpreted as bullish. The reason: Lower crude prices meant less inflation pressure.

So which is it? Are lower energy prices bullish or bearish for bonds? The answer RIGHT NOW is apparently bullish. Crude futures dropped yet again, losing $1.81, and the response in the bond market was a rally -- 13/32 recently on the Long Bond future. Will this relationship hold? Is there a point at which these falling energy prices will once again be a negative for bonds? That's a question we don't know the answer to yet.

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