The Bond Market Clearly Expects A Rate Cut. But, When?
Posted on May 20, 2007
Filed Under Bond Market, Equity Markets, Politics, Real Estate Investing, Stock Market |
Watching the bond market is usually a fairly good predictor of which way the benchmark overnight rate wind blows. Everyone is speculating about an upcoming cut but I still don’t look for it at the next meeting, if at all this year.
But, pressure is building toward a cut.
Here are the historical facts - When the spread between the 90 day Treasury note and the overnight funds rate gets too big an adjustment happens, usually an adjustment to the rate set by the Federal Reserve.
Today, that spread is 60 basis points pointing to a rate adjustment down - a cut. Many are correctly pointing out that it is the largest spread since the days after 9/11 but there were other factors in play at that time too. When you take an isolated data point and presume it to be the cause of the effect you run the risk of being wrong, sometimes very wrong.
The spread will have to close but the Federal Reserve can do something other than cut the rate, they can adjust the money supply. No, they are not the same.
The latest economic numbers are a relief the governors at the Fed because they point away from needing to increase rates. Now, that would be a problem given the other factors in the markets right now. So, they don’t have to increase the rates and the outward pressure is to perhaps cut them. But, not so fast.
Bernanke is more of the Volker model, he is likely to adjust the money supply first, as he has since the beginning of this year. Inflation is still a worry just not a crisis.
However, if we continue to see the spread remain this big or grow then the pressure for a rate cut will increase. If we see a cut this year, I don’t expect it before the third or fourth quarter.
This is bad for speculators in all of the equity markets, especially the bond market, but good for investors.
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2 Responses to “The Bond Market Clearly Expects A Rate Cut. But, When?”
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Great post! I agree that the wind is blowing in the direction of a cut.
But, Bernanke is going to try adjusting the money supply before he dives into another rate cut as long as inflation continues to loom large in the wings.