Jump?? How High???
We have been banging this drum all year long, the mantras are "interest rates will go up farther then what most expect or anticipate"; "the existing bond market will get trampled under foot" and "do not go against the dollar".
Making his last testimony in front of the Joint Economic Committee Fed Chairman Alan Greenspan said that while the economy is retaining "important forward momentum" as economic fundamentals remain "firm," "uncertainty surrounds the outlook for inflation," words that confirmed the Fed will continue to ratchet up rates at the low end of the spectrum.
In addition, the long end of bond market is finally yelling uncle and will soon start screaming bloody murder. This will be precipitated by several factors; the "core" inflation rate finally getting hit by the energy induced stagflation in the supply chain; the reintroduction of the 30 year long bond in January; and massive upcoming Treasury auctions in 06 to pay for the 70% of our total debt which comes due in 2007.
In those auctions foreign central bank participation will be reduced and this years windfall petrodollars purchases will be increased. We are seeing a slow unwind of long oil positions, along with today's short covering induced surge in oil prices, yet the transports are at an all time high. Read between the lines.
We previously predicted oil to pull back to $52 per barrel, we still stand by that and go further in suggesting that an overall commodities pullback will occur as worldwide economies take a respite in Q1.
Unlike what happened in October (oil based equities followed the underlying commodity) in falling from $70 back to $59. This pullback is due to crude options & futures speculators getting chased from the markets by a flattening yield curve.
This pullback should induce a very nice year end market rally, which will pull money from the bond market and hurt the dollar from a petrodollar support perspective.
However, the fed raising low end rates; the bond market raising high end yields and the windfall petrodollars going for higher yield new bond issues will more than support the greenback, and finance 70% of our debt for another 30 years.
In addition, due to massive hurricane induced government spending; already evident economic undercurrents (which were hampered this year by high oil & hurricanes; GDP still rose to 3.8); and the coming pullback of commodities & inputs costs, the economy after a recession induced respite, will get up off the carpet and the ensuing inflation will drive rates up even further later next year.
Now exactly how high could those rates jump?? Today the 10 year closed at 4.65, the previous highest closing level for the 10-yr in 2005 was 4.64%, which was reached on March 28 when the fed funds rate stood at 2.75%, that was a spread of 189 basis points and was 125 basis points ago.
Today fed funds is at 4.00 and the spread between FF and the 10 year is only 65 basis points, do you really think the financials are going to operate without that spread?
Take 4.00 then add half of the 190 point spread in March, then add 50 basis points for bumps in Dec & Jan. that should give a good estimate of around 5.45 on the 10 year by Jan 06 and thats being conservative. Now add another 150 basis points to 5.45 and you get what a 30 year mortgage is going to look like, around 6.95%.
That's not a typo, 5.45% on the 10 year by Q106 is totally possible, and in fact 6.00 or 6.25 based on the 189 point spread in March is not out of the question either. And no, I have not fallen and hit my head or long poured myself tonight, just keep repeating those mantras, one more time...
Making his last testimony in front of the Joint Economic Committee Fed Chairman Alan Greenspan said that while the economy is retaining "important forward momentum" as economic fundamentals remain "firm," "uncertainty surrounds the outlook for inflation," words that confirmed the Fed will continue to ratchet up rates at the low end of the spectrum.
In addition, the long end of bond market is finally yelling uncle and will soon start screaming bloody murder. This will be precipitated by several factors; the "core" inflation rate finally getting hit by the energy induced stagflation in the supply chain; the reintroduction of the 30 year long bond in January; and massive upcoming Treasury auctions in 06 to pay for the 70% of our total debt which comes due in 2007.
In those auctions foreign central bank participation will be reduced and this years windfall petrodollars purchases will be increased. We are seeing a slow unwind of long oil positions, along with today's short covering induced surge in oil prices, yet the transports are at an all time high. Read between the lines.
We previously predicted oil to pull back to $52 per barrel, we still stand by that and go further in suggesting that an overall commodities pullback will occur as worldwide economies take a respite in Q1.
Unlike what happened in October (oil based equities followed the underlying commodity) in falling from $70 back to $59. This pullback is due to crude options & futures speculators getting chased from the markets by a flattening yield curve.
This pullback should induce a very nice year end market rally, which will pull money from the bond market and hurt the dollar from a petrodollar support perspective.
However, the fed raising low end rates; the bond market raising high end yields and the windfall petrodollars going for higher yield new bond issues will more than support the greenback, and finance 70% of our debt for another 30 years.
In addition, due to massive hurricane induced government spending; already evident economic undercurrents (which were hampered this year by high oil & hurricanes; GDP still rose to 3.8); and the coming pullback of commodities & inputs costs, the economy after a recession induced respite, will get up off the carpet and the ensuing inflation will drive rates up even further later next year.
Now exactly how high could those rates jump?? Today the 10 year closed at 4.65, the previous highest closing level for the 10-yr in 2005 was 4.64%, which was reached on March 28 when the fed funds rate stood at 2.75%, that was a spread of 189 basis points and was 125 basis points ago.
Today fed funds is at 4.00 and the spread between FF and the 10 year is only 65 basis points, do you really think the financials are going to operate without that spread?
Take 4.00 then add half of the 190 point spread in March, then add 50 basis points for bumps in Dec & Jan. that should give a good estimate of around 5.45 on the 10 year by Jan 06 and thats being conservative. Now add another 150 basis points to 5.45 and you get what a 30 year mortgage is going to look like, around 6.95%.
That's not a typo, 5.45% on the 10 year by Q106 is totally possible, and in fact 6.00 or 6.25 based on the 189 point spread in March is not out of the question either. And no, I have not fallen and hit my head or long poured myself tonight, just keep repeating those mantras, one more time...
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