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Posted on April 8, 2015 -
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By John Reizner |


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I wrote in my October 14, 2014 blog post here that I had concluded for a number of reasons that the likely direction for the closely watch ten year interest rate was for the rate to move lower. This was despite the majority view on Wall Street that rates instead must rise. I reported that TNX, the CBOE Interest Rate 10-Year T-Note, was trading at that time at 20.90. The ten year was 2.09% at that time.
 
In the post I said that TNX was technically at support and might temporarily rally before resuming the downtrend that I envisaged. That scenario in fact occurred as TNX rallied from $22.06 in October 2014 to $24.07 in November before declining to a low of $17.17. The ten year rate rose from 2.09% in October to 2.40% in November and then bottomed in January 2015 at 1.70%, It now rests at 1.90%.  I also suggested at the time that as long as the velocity of money was in the tank, the economy may not recover and rates might head lower.
 
Many prominent economists on Wall Street have forecasted for an extended period of time that rates were due to increase because of impending Fed tightening. Talk about a bond market “bubble” and the specter of rising rates had been floating around the Street for a couple of years and became many forecasters’  mantra. For the most part, Street economists stood fast in their predictions of higher rates but that outcome just did not materialize.
 
In reality, the majority of economic commentators were flat-out wrong and rates instead moved south over time. Currently, opinions are divided on the question whether rates may increase from this date while the guidance from the Federal Reserve is fluid and inconsistent. This prediction game has been going on for a couple of years.
 
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I cited technical reasons in October for the prospect of a further decline in rates as a result of my interpretation of the MACD indicator on the monthly chart. That chart showed a transition from an existing primary uptrend in interest rates with secondary slowing momentum -  to a primary long term downtrend.
 
Now TNX is trading at $19.11 indicating a ten year rate of 1.90% The MACD on a daily timeframe shows that the TNX remains in a primary downtrend though with rising secondary momentum. The weekly chart shows the ten year note in a primary downtrend and the MACD histogram representing momentum may cross below zero if rates continue down. TNX is also trading near the lower end of moving average bands that are pointed downward on a daily timeframe.
 
If TNX trades toward its upper moving average bands, then the primary trend on the daily may change to an upward bias in rates. Rates may move up before they resume a downward trend.
 
The controlling weekly trend and momentum for TNX and rates appears to be down.  A picture is worth a thousand words – I am still anticipating receiving permission to post a major vender’s charts on this site so that you may be able to view what I am looking at.
 
It may be useful to examine how the majority of economists were wrong while they forcasted for the last few years that interest rates would surely increase and bond prices might collapse.
 
Is the real reason rates declined while confounding the majority, as I suggested in October – that the economy is still struggling, not improving markedly, with an entire class of Americans experiencing downward mobility in their jobs and finances, remaining dependent of the largess of government aid just to survive even while having a job?
 
If the economy is recovering as many economists on the Street indicate, then let them explain the meaning of the fact that the number of Americans receiving food stamps has more than doubled in the last eight years and now approaches 50 million people. Is the reason why interest rates declined instead of rising over the last several years because of underlying economic weakness in the country and debt induced deflationary pressures?
 
There may be green shoots in the economy that encourage economic commentators to say that the economic recovery is on track. Rising consumer confidence, an improving housing sector and strong automobile sales are bright spots.
 
Yet many auto loans are effectively “subprime” with six year terms – implying that the consumers are strapped while they are buying automobiles. The housing sector has shown genuine signs of recovery as the number of pending home sales has advanced this year. The availability of bank credit for potential homebuyers still remains low as twenty percent down payments for mortgages are mandatory. Some renters will likely not buy homes as many are having a tough time paying their monthly rent.
 
I maintain the view that the economic recovery is weak and vulnerable. This economic “recovery” from the depression that the country experienced at the time of the financial crisis may be increasingly fragile and even vulnerable to relapse into recession as time passes.
 
 
If the economy is showing renewed signs of weakness as I would suggest as evidenced by the latest poor job numbers, flagging retail sales and continued weakness in the manufacturing sector, then a potential continuation of the downtrend in interest rates may make sense.
 
Some commentators have maintained that the cold winter weather and the Los Angeles port work slowdown impacted recent economic reports and they state that warmer weather and the resumption of work at the port portend future strength in business activity.
 
If the winter weather and port strike produced only a temporary lull in economic activity and the recovery strengthens in the future, then I will concede that my opinion is wrong. But I think that the weakening employment numbers from the last report mayneed to improve to say that the lull in the economy was temporary.
 
As events unfold, we will see if my call for fleetingly higher ten year rates before a resumption of the downtrend proves to be correct for a period of time.  It should be interesting to be a spectator of the interplay between interest rate policy implemented by the Federal Reserve and the interest rate that the bond market determines. The level of the all-important ten year rate may act as a barometer of whether the economy is gaining strength or not.
 
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