Updated – Interest Rates – “The Fun is Over”

Posted by Richard Russell vs David Rosenberg

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I’ve written repeatedly that the Fed can follow its path of QE, short for the euphemism “quantitative easing” (which, in turn, is the secret code for wholesale printing of money), until the bond market says “no more.”

Well, the bond market is speaking (Updated 04/13 @ 3:08pm PST)

Dear Mr Russell,

You have mentioned that bond yields will likely rise – and rise faster than expected.

However, other key analysts like David Rosenberg have pointed out that as the US baby boomers start shifting their wealth into bonds (from equities and real estate), this will drive yields down in next 3-10 years.

Any comments on this factor? Thanks in advance.

Russell response (Update 04/13 @ 3:08pm PST) — David Rosenberg is an excellent analyst. But his thesis that bonds are headed higher because of baby boomers desire for yield is a very risky and theoretical scenario. Personally, I prefer to follow the market, which means the charts. The chart below (from the Chart Store) tells an entirely different story (I showed this chart just before the bond market cracked. Here we see a huge head-and-shoulders BOTTOM pattern with an upside breakout, which means that interest rates are now heading higher. Please show this chart to Mr. Rosenberg.


Russell vs Rosenberg 04/12/2010

From Russell

— it’s saying, “Enough.”. Lower bond prices mean rising rates. With the long-Treasury bond breaking down, higher rates should first hit the housing market, where the rate for a 30-year fixed mortgage has climbed half a point since December, hitting 5.31% last week. Just as the increase in interest rates accelerates, the Fed has halted its emergency $11.25 trillion program to buy mortgage debt, which places ever further pressure on rates.

Russell comment in four words, “The fun is over.”

Chart via Money Talks (source HERE)


Home sellers now face what I believe will be at least a 20-year bear market in bonds. How so, Russell? From the early 1980s to 2010, the US economy has enjoyed a 30-year bull market in bonds resulting in consistently lower rates. This was a huge force behind the real estate boom. Today’s home owners and would-be sellers don’t realize it, but we are still in a bear market for housing. Interest rates have put a cap on housing prices. I see it here in La Jolla. Sellers of houses are holding out for peak and ridiculous prices, not wanting to lose money from their purchase price at the top. Potential buyers don’t have the cash or the credit to take out mortgages. The next phase — sellers will finally “get it.” The housing bonanza is over, and the price and market value of homes will be heading down.

If there are any surprises in the mix, here’s what I think they may be: Rates will move up FASTER than many think possible. Second surprise — cash is going to be loved and WANTED. But I’ve been telling my subscribers that for years.

x- From Richard Russell – Dow Theory Letters. Richard has made his subscribers fortunes. One of the best values anywhere in the financial world at only a $300 subscription to get his DAILY report for a year. HERE to subscribe. Amongst his achievements Richard was in cash before the 2008/2009 Crash and he has been Bullish Gold since below $300


From David Rosenberg

“You really have to have a read of “Yield Views Couldn’t Differ More” on page B1 of the weekend WSJ.  It pits Jim Caron, a good pal and former Merrill rates- strategist colleague against Goldman Sach’s Jan Hatzius, a former formidable competitor and I would argue runs one of the best, if not the best, economics houses on Wall Street.  Jim is bond bearish, Jan is bond bullish.  The world pretty well knows my view (Ed Note: see below).  The article talked more about supply than it did about inflation, which is the much more critical ingredient in any simulation of interest rate determination.

The “Current Yield” column in Barrons also runs with the bond-bear theme (“Next, a Sharp Jump in T-Yields”).  This time, and again, it focuses on the Morgan Stanley forecast of a 5.5% peak in the yield of the 10-year note.  We are told in the article to throw away the econometric models of the past and rely solely on the supply backdrop.  Again, this logic defies how bonds rallied through most of the Reagan years despite all the bond supply used to spend the Russians out of submission in terms of military expenditure.  We are also told that the consensus is underestimating the recovery — another reason to be bearish on bonds. “

One reason why interest rates cannot rise (Ed Note: emphasis mine) is because if they do, there will never be a sustained improvement in the pace of economic activity, especially housing. One reason why interest rates cannot rise is because if they do, there will never be a sustained improvement in the pace of economic activity.  Housing is the classic leading indicator, and the most interest-sensitive sector, and until it revives, it seems highly unlikely that bond yields will rise on any sustained basis or that the Fed will embark on a path towards higher policy rates.   For a truly sombre assessment on the prospects for a housing recovery, see what Robert Shiller has to say on page 5 of the Sunday NYT biz section. (“Don’t Bet The Farm on the Housing Recovery”).

….read David’s whole report HERE.



….read David’s whole report HERE.