Friday, January 12, 2007

U.S. bond market and the price of fish and chips

The rising price of buying a pint at the pub is scaring Mervyn King and company. In a surprise move yesterday, the Bank of England hiked their benchmark repurchase rate to 5.25%, a five-year high. Good, now that its the same as Fed Funds, I can remember it better.

Today we got a surprisingly strong retail sales figure. This was particularly surprising given how dour the Christmas reports were from many big retailers.

December and January have not been kind to bond bulls. But it sure feels like the market is oversold. I still think the Fed will wind up cutting once or twice, and that will allow the 10-year to end the year close to where it is now. My prediction piece said 4.90%, so as we approach that number I'm likely to increase duration. I think we'll see a rally down to 4.50% or so at some point and I plan to profit from it.

2 comments:

Anonymous said...

Did you take Trichet's recent comments as being somewhat dovish in tone ? Will the ECB still tighten in March ?

Accrued Interest said...

I don't follow the UK or Eurozone markets as closely as I follow the U.S. So take anything I say about Europe with a grain of salt.

Anyway, I do think the ECB winds up hiking 2-3 times in '07. It looks to me like a hike in March is priced in already, so I'd say a hike in March is a good bet.

The U.K. has an overt inflation target, so they are more likely to make tweaking moves in their monetary policy compared with the U.S. I have no view on what the next directional move is for the U.K. My best guess is that King is happy where they are and the next move will depend on how the economy shakes out. Sound familiar?