Saturday, November 29, 2008

Interest Rates and the Dollar

There is a good article at Naked Capitalism on interest rates and the dollar. Two of the anomalies noted there:

1. Long dated Treasuries rising (a deflation signal) as stocks stage a dramatic rally

2. Dollar weakening while long dated Treasuries rise (the dollar and bonds usually go together)

The first item is actually consistent with many periods of market history when rates fall and stock prices rise. We have, after all, just been through a long period of falling rates and rising stock prices beginning in the early 1980s and continuing until either the dot-com crash of 2000, or perhaps until the present crisis. When long-term rates fall, the present value of corporate earnings streams rises.

The second item occurs in the context of a great variety of contending and fluctuating forces, making currency and Treasury directions very, very hard to call. But this is not inconsistent with some periods of history. If there is some expectation of a collapse under all this debt, there should well be ambivalence about Treasury debt and the dollar.

Others have already commented that long rates will continue to stay low until added money is not consumed in the deleveraging, perhaps not until there is a real economic expansion, which could be a long time off. Or perhaps continued stimulation will make it occur sooner.