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Bond traders the world over have a reputation for pushing their case too far, but it is the market’s natural tendency to over shoot in both directions – upwards and downwards that keeps traders happy.
The US Federal Reserve, having raised interest rates 17 times in the last two years, has for the fourth consecutive month left rates on hold. But if you take a look at the chart below you will see that since mid-July bond traders have started to bet on an easing of rates some time this calendar year:
Chart 1 - US T-Bonds Daily Line Chart
click chart for more detail
Predictably, the Chairman of the Federal Reserve, Mr Ben Bernanke is weighing his every word, cautious of the soft housing numbers he sees ahead. He is not convinced the ‘inflation genie’ is back in the bottle nor is he totally convinced that growth has slowed to a low inflationary pace.
The bond traders are becoming a tad impatient as they want things their way. However, they may have to cool their heels for a while as Ben might just have his way in the short term. But if we look at the bond price forecast, we’ll see that it indicates an interest rate cut by April.
So it seems, the ponderous Ben Bernanke and the impatient bond traders will both have their way – but it will all come down to the timing.
Enjoy the ride
Tom Scollon
Chief Analyst
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