Conflicting Signals

  That interest rates have been rising for 3 years now is not news. But there are strange things going on in the bond markets that bear watching.

With rates rising, one would think that investors would tend to avoid longer term bonds because they can’t be redeemed and moved into new higher rate bonds for a long time. Yet, this is not the case.

Demand for long term bonds, some up to 30 years to maturity, remains very strong, keeping long term interest rates lower than would be expected in a rising interest rate market.

We have conflicting evidence right now— we can see signs of inflation with our own eyes in high gasoline prices, rising utility costs and such. But the bond market reflects the sum total of all the decisions of all the bond buyers in the world, and those folks tend to be pretty savvy. After all, they control a vast proportion of the world’s wealth, and they did not get all that money by making a lot of stupid moves.

Stay tuned for next month’s article on what bigger things could be unfolding that are not yet evident.