My current thinking on US interest rates:
* It is my current view that by the end of 2004, yields across the entire
Treasury curve will be higher than where they stand at present. In fact, I
continue to believe they will be higher than where they ended last year.
Obviously, this will not occur at the very short end of the curve (the so-called
"bill range") unless the Federal Reserve moves its federal funds target rate
higher than the current 1%.
(NOTE: As of yesterday, yields at the extreme ends of the Treasury curve
-- 90-day bill (coupon-equivalent), versus the 5.375s of 2/15/31 -- were 0.95%
and 4.85%, respectively. As of 12/31/03, the respective numbers were 0.92%
and 5.07%.)
* Alan Greenspan continues to indicate the Fed will drag its feet as long
as possible before raising its administered rates. Regrettably, I believe
that much of this tenacity is based in political considerations. In additon, I
also believe that the longer the Federal Reserve overstays its welcome, the
worse the ultimate consequences will be in the impact on open-market interest
rates.
* Nevertheless, Greenspan has materially changed market expectations.
This is seen clearly in the following table, which looks at what has taken place
in the federal funds futures market since the FOMC's last meeting, held in
late January.
--------------------------------------------
FEDERAL FUNDS FUTURES -- 03/01 VS. 01/28
--------------------------------------------
03/01 01/28 BP Scheduled
Contract Close Close* Chg. FOMC Meetings
----------------------------- -------------
Mar. '04 1.01% 1.01% 0 Mar. 16
Apr. '04 1.00% 1.02% -2 No Meeting
May '04 1.02% 1.07% -5 May 4
June '04 1.02% 1.10% -8 June 29-30
July '04 1.07% 1.18% -11 No Meeting
Aug. '04 1.13% 1.27% -14 Aug. 10
Sep. '04 1.19% 1.35% -16 Sep. 21
Oct. '04 1.25% -- -- No Meeting
Nov. '04 1.34% -- -- Nov. 10
Dec. '04 -- -- -- Dec. 14
--------------------------------------------
*Date of last FOMC meeting.
--------------------------------------------
* The above run suggests a 25 basis-point hike in the funds rate in
August. I wonder about this, however, in view of how politically subservient
Greenspan has become to the White House. On the other hand, should decide to pass
on the fifth term Bush promised him last April, in exchange for Greenspan's
political support, all bets could be off. And, yes, I do think there is a
chance the Fed head just might declare victory and get out of town.
(NOTE: Greenspan's current term expires on 6/20, so if he is planning an
escape, there's not a lot of time to spring the news.)
* Examples abound of the bulls' desperation to paint a "rates-won't-rise"
picture. This week, it can be seen in two specific areas, to wit: (1)
Emphatic forecasts by some of a rate cut on Thursday by the European Central Bank,
and (2) as bizarre if not perverse as it might seem, the appearance of an
implicit hope by some that Friday's employment report is not too strong. In other
words, some on Wall Street now quietly champion a "jobless recovery," if that
is the price for maintaining low interest rates and high stock prices.
I'm not saying the ECB won't cut rates this week, although it would be
wise for it not to do anything resembling a response to Wall Street
greedmeisters. Moreover, a cut of a quarter point, from 3% to 2.75% in the rate
underpinning the ECB's marginal lending facility, is not likely to close the
open-market gap between Treasury yields and the yields available on government bonds
in countries tied to the euro. And it certainly will not close the current gap
between Treasuries and UK yields.
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BASIS-POINT DIFFERENTIALS -- US TREASURY
SECURITIES VERSUS THE SOVEREIGN DEBT
SECURITIES OF SELECTED COUNTRIES
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Maturity
Date ----------------------------
Country 2004 1-Year 2-Year 5-year 10-year
-------------------------------------------------
Australia 03/01 5.32% 5.20% 5.43% 5.47%
United Kingdom " 4.14% 4.35% 4.67% 4.79%
Germany " 2.03% 2.24% 3.26% 4.05%
UNITED STATES " 1.10% 1.65% 2.96% 3.99%
Japan " 0.02% 0.06% 0.48% 1.27%
-------------------------------------------------
Australia 03/01 -422 -355 -247 -148
United Kingdom " -304 -270 -171 -80
Germany " -93 -59 -30 -6
Japan " +108 +159 +248 +272
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