Author : John E. Charalambakis
Date : February 14, 2014
One of my favorite authors is Isaiah Berlin. I consider his anthology of essays by the title “The Proper Study of Mankind” as one of the finest books published in the 20th century. Isaiah Berlin had a notorious ideological conflict with Isaac Deutscher. Their public disagreements were rancorous, each one defending his position with passion (Berlin the classical Anglo-American liberalism, and Deutscher the Marxist interpretation of history). I believe that the bond market a.k.a. as the largest liabilities market on planet earth is facing a similar conflicting situation over the course of the next one-two years.
Here are a few reasons why this may be the case:
I believe however that the situation may not turn out to be as expected, i.e. experience an environment of constantly rising yields. Rather, I believe that yields will be going sideways for the foreseeable future, and may even decline just a little bit. Let’s review some of the reasons why this may be the case:
Empirically speaking, we saw that yields and interest rates dropped in the last two weeks. It seems then, that we are positioned for counter-balancing forces in the bond/liabilities market. As technical analysts would tell us (e.g. Michael Kahn’s article in Barron’s this week), signs are that a triangle (double-top) pattern is being formed in the 30-Year, 10-Year, and even 2-Year Treasury Bonds/Notes. As the triangle develops (see graph below), yields tend to be pushed lower.
It is my anticipation then that the bond market may exhibit signs of going sideways which would allow the Treasury to keep financing the debt at low rates. That in turn will feed the demand for loans, and therefore will keep bumping fuel to the economy. One more reason then, to start wondering if inflationary signs start making their appearance by year’s end.