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March 19, 1999
Low-fee mortgage rates and 30-year T-bond yields reached post-January lows this week at 7.00% and 5.48% respectively. The decline to these particular levels offers an important clue about rates for the rest of the spring, and the clue doesn't have anything to do with inflation or economics. "Technical" analysis refers to interpreting patterns on historical charts of markets, and employs a grand set of jargon involving support and resistance levels, double tops and triple bottoms, head-and-shoulders formations.... Many people misunderstand technical analysis (Louis Rukuyser semi-derisively refers to the practitioners as "elves"), and regard it as a form of financial astrology. It is not. Technical analysis is the semi-science of measuring the relative weight of buyers and sellers in markets. Most of the time "fundamental" analysis -- the Fed, the economy, inflation, the job market -- prevails. However, in low volatility, relatively trendless times, technical analysis is a big help. As in... these times. The 7.00/5.50 level is roughly the 30-year low set in 1993, reached repeatedly since, and unbroken until the September-January stretch just past. That five-month break to a 35-year low had an extreme fundamental foundation: the assumption that the American economy was about to slip toward recession, and fear that the external economic world was going to end altogether. Neither has happened. Every day the external economy looks better (except Japan... and oil...), specifically in Mexico, Brazil, South Korea and Thailand, and the American one soars in irrepressible good times. Here is the technical equation: if in very different fundamental economic circumstances than September '98-January '99 long term rates break back down below the 30-year low, then there is a good chance rates will stay down and go even lower. Why? A renewed, powerful excess of bond buyers over bond sellers. In the late 1990's, both the stock and bond markets have been defined by a succession of market excesses: waves of investment money overwhelming all barriers economic, chart, Fed, theoretical, and rational. In technical land it doesn't matter where the money comes from or why: compulsively saving pre-retirement Boomers, irrationally exuberant on-line addicts, fearful foreign investors trying to buy anything denominated in dollars, Russian crooks, Indonesian crooks... whatever. If rates don't break down through 7.00/5.50, expect to wander around between there and the 7.25/5.75 high until some fundamental accident.
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