Whither Interest Rates?

Published on: 14:00PM Dec 08, 2010

 The last few days has seen grains doing a bit of a three-step (5-step?) dance: two steps up, one step back. Nothing unusual about that action, not in December. 

The bond market was pummeled yesterday, starting in the European markets after the White House announced a deal with the Republicans to continue the Bush tax cuts for two years in return for extending unemployment benefits for one year.

Bonds were off sharply most of today, fearful of the Eastern 10 year bond auction. Although they ended the day down (implying interest rates up), most of the day’s losses were recovered after the auction.

There are several possible reasons why the bond markets expect rates to rise. Included are (1) the Fed can’t keep the Fed Funds rate at ¼% forever; (2) the economy will get well, starting next year; (3) inflation is just around the corner… or maybe that’s just around the next corner after this one; (4) just because. Whatever it is the market thinks – and it would be a mistake to expect that it knows what it thinks – interest rates have begun to rise. If the charts are correct, we have a lot more to come.