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May 22, 1998
Mortgage rates reached their lows for the half-dozenth time since December; and once again, on time, crisply bounced off the 7.125% bottom, headed back up.
Our unprecedented economic situation -- boom times, negligible unemployment, invisible inflation -- is reflected in unprecedented trading patterns in the bond market.
Example: news of a record $13 billion trade deficit in March created this week's bond rally and interest rate dip -- exactly the reverse of the textbook response and all the bond trading experience in this century.
A big trade deficit should be bad for bonds because deficits flood the world with excess dollars. Sooner or later the dollar will fall in value, which will cause inflation, which will cause either the Fed or markets to do unspeakable things to bonds.
Instead, bonds did better, on the following tortured theory: the trade deficit is growing because Asia can't buy our stuff; therefore our economy is about to slow, and we needn't fear inflation or the Fed.
I've had enough New Age theories for a while. It makes me edgy when the theorists come up with a neat new theory each week to explain the inexplicable.
If the normal benchmarks for bonds and interest rates are sitting on the bench, how about a simple comparison of American bond yields to other government rates around the world?
90-day Ten-year
Canada 4.71% 5.38
France 3.45 4.98
Germany 3.62 4.93
Italy 5.05 5.18
UK 7.15 5.83
Japan .35 (1-year) 1.52
Note, please. Japan is in a probably worsening depression. The euro nations share budget discipline and interest rate "convergence", including the previous inflation basket case, Italy. The UK is the reverse of Japan, as the Bank of England has driven short term rates above long term ones (a "yield curve inversion") in an effort to slow an overheated economy.
Note further: the American equivalents are 5.23% and 5.65%, meaning that outside of the overheating UK, America has the highest-yielding 10-year government bond in the industrialized world.
There is room for our rates to fall, thirty-year record resistance or not.
Only a grumpy Old Time Inflationary Overheater would observe that there is also room for the Fed to have to do to us what the BOE is doing across the pond.
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