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Monday, August 23, 2010

When Will Interest Rates Rise?

Probably the main question do-it-yourself (DIY) investors are asking today is when will interest rates rise? ;Nobody, of course, knows when but we do know what investors look at. One is the Treasury auctions. To the extent they go well, it indicates a strong appetite for U.S. debt and indicates that investors are comfortable with yields. This has been the case of late to the chagrin of many professional investors including Druckenmiller. Sometimes a strong appetite indicates investors are afraid to invest in anything else.

How can DIY investors follow the auctions? One way is provided by the Bloomberg site. There, the drop down list under "Market Data" includes an economic calendar produced by Econoday. The calendar includes Treasury auction dates and information along with commentary after the auctions. Commentary is also provided by CNBC for those who prefer that route.

Click Image to Enlarge
As you can see in the write-up, the important factors are the coverage, the rate, and the indirect bid. Coverage indicates the size of the bid. ,If the auction was for $2 billion and bids totalled $4 billion then coverage was 2.0. Thus, if the coverage is weak (i.e. surprisingly below average), or the rate is much higher than expected, or if non-professional bids are not robust, then it is time to start worrying.

This week we have 2-year, 5-year, and 7-year Treasury note auctions for a total of $102 billion. The economic calendar referred to above looks like this:

Click to Enlarge Notice that the auctions take place at 1 pm. If you want to get bids in, you have to put them in before 1 pm. Clicking the link after 1 pm will get you the results of the auction. Notice also the 2-year is auctioned first, on Tuesday, followed by the 5-year on Wednesday, and then the 7-year on Thursday. If the shorter maturities have a lackluster auction, it typically doesn't bode well for the longer maturities.

3 comments:

  1. I don't know when interest rates will rise either, but I do get the feeling Treasuries and mortgage rates are being manipulated below equilibrium by the Fed and others, and corporate rates are more reflective of long-term interest rate reality. Strangely enough, there seems to be plenty of demand for Treasuries paying near 0 interest.

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  2. Agreed, that no one really knows when interest rates will be going up.

    If rates increase, would a DIY index/ETF investor really change his strategy though? In other words, if your portfolio is solid, wouldn't you just continue as planned?

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