Rate Breakout Stalls

Despite strong economic data, a succesful GM IPO and a sharply higher stock market, interest rates failed to hold their breakout level, closing at 2.90%.  Based on closing highs, I rate this as a three-day test of the high which generally marks a top.

The recent rate rally came despite the Federal Reserve's effort to drive rates down by purchasing $600 billion in government securities.  Some analysts were surprised that the market could truly be bigger than the Fed.  Yet in the next few months, the Fed is expected to buy as much as $900 billion.  Some Fed officials have also commented that "this is a good start," implying that perhaps additional quantitative easing programs will occur should the economy still not pick up steam.

From an additional technical standpoint, that of Elliott Wave analysis, one can see that we have had two waves up from the 2.35% low.  This is consistent with a correction in a Bear Market.  With this in mind, I once again look for the continuation of interest rates to move lower, perhaps with the 10-year rate being driven down to 2%.  Should we fall as low as 2%, there will truly be a deflation scare, despite the fact that the Fed is manipulating the rates.

It's hard to imagine what the real story might be, driving the Fed to take such strong measures.  The GM IPO has thus far proven to be a success.  Company officials are saying that even though we are in the low cycle, we are still going to be profitable.  Stocks are rallying and are at pre-crash levels now.  But the Fed not only chooses to continue pumping liquidity into the economy, pushing up commodity prices and upsetting our foreign trading partners, but the Fed has also announced that they are again going to run bank stress tests.

Perhaps bad bets held by banks in hidden Special Entities offshore and off-balance sheet still causes the Fed major concern.  It's clear that there is still little transparency in our markets.  It remains to be an extremely risky situation.  For the past couple of years, all of the Quantitative Easing appears to have been designed to help shore up the banks to protect them when the big problems come to light.  But let's see if the banks will truly shore up capital from the guaranteed profits the Fed has provided them.  Or will multi million dollar bonuses show that banks are doing nothing more than continuing their greedy ways at the expense of those who must remain conservative and hold their money in CDs and other interest bearing accounts.

This is truly a crime against our seniors and others who can't or won't again risk their hard earned money.