Interest Rates Headed Back Down?

By Dr. Duru written for One-Twenty

July 22, 2007

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The dollar continues to lose value, the financial stocks continue getting sold, and, uh, I daresay, interest rates are also on their way back down. It is strange to see the financial stocks do so poorly given the recent decline in rates. Perhaps folks are finally getting too nervous about perceived risks in the financial sector regarding all the highly leveraged bets, bad mortgage debt, and all the rest: they flee the financial stocks and hide in the relative "safety" of Treasuries. If the stock market in general follows suit, then we will know that investors are also fearing greater economic malaise ahead.

I have redrawn the long-term decline line for interest rates as follows:

10-year treasury, long-term

The false break-out in 2006 now becomes the last connecting point for the new downtrend line. As usual, carefully note that over the years we have had many spikes upward in interest rates that finally gave way to the general worthlessness of the American dollar and/or another attempt by the Fed to rescue the economy from the latest malaise it helped create. While the steady creep in rates since 2003 is the longest sustained run in the 25+ year overall decline, the downtrend is looking more and more like it wants to resume. The break-out that we had in June has been re-tested twice. Friday's retest failed.

10-year treasury, short-term

Stocks typically cheer lower interest rates, so let's see whether the bulls take this opportunity as a new reason to keep buying stocks. Or will the bears be able to lean on fears of a larger economic slowdown?

Be careful out there!

DR. DURU®, 2007