Economic Commentary

The Rate Story

The bond market has been relatively quiet for the first month of the year. There have been some pretty significant swings from day-to-day, but generally rates have stayed in the same range since late December. This “bouncing around” has occurred after a pretty significant increase starting in November. Of course, the question on everybody’s mind is: will rates start back up as soon as evidence of additional economic growth is evident? Many analysts are expecting this to be the case. From a recent CNN/Money article: “People are taking a wait-and-see attitude about the degree of intensity of the recovery, with everyone trying to figure out if we’re going to have lackluster growth or robust growth,” said Bill Larkin, portfolio manager at Cabot Money Management. “The market is basically saying QE2 is going to dissipate mid-year, and housing and employment are two wild cards — with Europe is in there too.”

One of these wild cards is expected to be played at the end of this week as the employment report is released. Some analysts say that we are due for a strong report after a disappointing one last month. That could cause rates to rise again; however, it does not mean the economic issues are over with. Therefore, the see-saw pattern could return. If you look at the big picture, we have had unbelievably low rates over the past three years because of the recession and slow recovery. Rates dropped even further when it looked as if we may have the threat of a “double dip” in the middle of last year. The economic recovery double dip did not happen and now this additional drop has been erased. Rates are right where they were at the beginning of last year, the first year of recovery and they are still very, very low. Most analysts are not expecting rates to go back down to where they were at the bottom absent very poor economic news. Therefore, the real question is–how strong will the recovery be this year? If the recovery continues to advance in strength as it has in the past three quarters, including a preliminary 3.2% reading just released for the fourth quarter, so might rates. And as rates go up, consumers who have been holding off on purchasing may be jumping on the bandwagon. Friday will tell an important story in this regard.


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