This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Can Japanese Rates Happen Here?

The last time we visited the Oracle of Delphi was in July . Curiously enough, that was the last time I felt it necessary to proclaim that crude oil prices were headed higher.

The purpose then and in today's restatement is not to glamorize the substance-induced hallucinations of our pagan predecessors around the time of Halloween -- that would be wrong, wouldn't it? -- but to emphasize that free will does not always operate in the manner intended. After all, we baby boomers were raised to believe both religious wars and infectious diseases were things of the past. How well have those triumphs of the rational endured?

Whither Rates?

Rising energy prices certainly qualify as the dominant market story of 2004, but the persistent bull market in bonds has to be a close second. The links between these two developments have been the Federal Reserve's refusal to offset the implied tax increase from higher energy by continued monetary ease, and the decline in inflationary expectations engendered by the combination of a flattening yield curve and this implied tax increase.

To top off the confusion, not only have the inflationary expectations as measured by the spread between Treasury inflation-protected securities (TIPS) and regular government bonds decreased since May, they have inverted as well. The consumer price index (CPI) is expected to increase at an average rate of 2.625% over five years, but only 2.371% over 10 years. The TIPS market is making something of a path-dependent forecast, and those have a lower success rate than regular forecasts, which scarcely have a success rate at all.

Inflation Expectations At Various Horizons
Source: Bloomberg

The path of real, or inflation-protected, interest rates has been declining since the beginning of 2000. The rate of decline has been anything but steady, however: Its volatility has increased markedly since the beginning of 2002. More important for the direction of rates over the long term, each upturn in yields fails at a lower level.

TIPS Yields Retreat With Rising Volatility
Source: Bloomberg

For those wishing to blame bond rallies on either a failing economy or on the effects of mortgage-related prepayment hedging by the likes of Fannie Mae (FNM) and Freddie Mac (FRE), the burden of proof is on you.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,224.38 -192.47 -1.11%
S&P 500 2,001.58 -19.67 -0.97%
NASDAQ 4,648.1890 -35.2180 -0.75%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs