Thursday, August 31, 2006

Interest Rates Are.......Dropping?

Uh......anybody out there got a prediction on interest rates?

I once read a study (wish I could find it to cite it) that showed how often economists get interest rate predictions correct. Remember, there are only three ways interest rates can move: Up, Down, or Sideways (no movement). Thus any idiot off the street when polled would have a 33% chance (1 out of 3) of getting interest rate movements correct. The study showed that economists on average are correct in predicting interest rate movements 31% of the other words they have the best job in the world - they get paid a lot of money to be wrong consistently. If the highly paid, highly knowledgeable, and highly connected economists can't get interest rate predictions correct, what makes you think you or I can? I've given up on predicting rates, even though I've been correct on predicting where rates would go, I've been consistently WRONG in predicting WHEN they will go where.....

Thus, this brings me to today's interesting insights on interest rates.

Interest rates are falling.

Yep, you heard me. After rising consistently for the past 18 months (at least on the short side) they have been falling for the past two months. Need proof? The 6 month Treasury bill was yielding 5.33% on July 18th, while the 10 year Treasury Bond was yielding 5.25% - both 12 month highs, yet today (August 30th, 2006) they are both down. The 6 month treasury now stands at 5.14%, or nearly .20% lower, not an incredible drop, but lower. The 10 year bond however has dropped to 4.76%, almost a full 1/2% point (.49%). Bonds have rallied over the past two months (this means the prices have gone up, thus the yields have gone down).

Even wierder is that the yield curve is still inverted, meaning short term rates are higher than long term rates. In fact, a money market account is yielding more than short and intermediate term bonds. Historically this has meant a recession is on the way, however I've ceased giving any credence to these "historical" markers.

My point here is that we cannot predict the future of interest rates, the stock market, recession, or War for that matter. All we can do is build a globally diversified portfolio utilizing several asset classes and varying maturities of fixed income. Contrary to popular belief, your returns will not come from making correct predictions, but from having the correct portfolio and behaving in the right manner.

Scott Dauenhauer, CFP, MSFP