US Interest Rates & Bond Market forecast for 2007

By: Nadeem_Walayat

The US Bond market had a volatile year, as the market wrestled with a resurgence in inflation during the first half of the year, and then rallied in the 2nd half on a weakening economy and speculations that US interest rates had or were near their peak.

The Fundamental Economic Picture - The US economy ends 2006, with slowing economic growth, a weak housing market, rising inflation and a declining dollar. The economic picture this paints both call for higher and lower interest rates. Where we need to look at for further clues is to the Fed. What would the Fed do ?, More importantly what has the Fed done in the past. The answer to this is clear - Cut interest rates and print money to ignite economic growth. Thus, even with rising inflation, and a falling dollar, the Federal reserve is likely to focus more on attempting to boost a slowing economy by cutting US interest rates as the danger is clear that another leg lower in the US real estate market on the back of record amounts of mortgage debt could tip the US into recession during 2007. That's the fundamental picture.

Technical Analysis of the US Bond Market

1. Trend Lines - The US T Bond breached support trendline this week at 112, thus suggests that the trend is targeting a move lower.
2. Support - Is at 109, with major support at 106.
3. Resistance - Is at 115, 118 and 119. .
4. MACD - The MACD is overbought and confirms the trendline break and suggests a trend lower for several months.
5. Price Patterns - The recent up trend was relatively weak, failing to get anywhere near previous highs of 119. This suggests the current downtrend will be significant and trend towards 106.
6. Time - The recent up trend was about 5 months in duration. The normal time for up trends is for between 3 and 5 months. So time suggests a significant downtrend correction is now likely.

US T-Bond and interest rates forecast for 2007
The Current trend is targeting a decline in the US TBond towards 106 from the current 111.5. The time frame for this decline is to between March and May 07. This trend is supported by the expected bearish trend of the US dollar price patterns going into the new year.

The Low in the T-Bond is likely to occur shortly before the Fed starts to cut interest rates, this is most probable starting in June / July as by that time the dollar may be making some sort of bottom in anticipation of Fed cuts to boost economic growth. There are likely to be a series of cuts, which we will analyse closer to the time they start.

The US bond market remains in a long-term up trend, the weakening US economy, despite higher inflation and a falling dollar supports the view that the US bonds will rise towards the 118 level or higher by the end of 2007. This is contrary to many market commentators, who fixated with the rise in commodity prices and US inflation envisage foreigners dumping US bonds and forcing interest rates higher. That just does not seem likely. Though any sharp dollar declines during the 2nd half will be accompanied by sell offs in the US Bond market, with recovery back on trend towards 118 following these sell offs. So the US Bond market will be as volatile as it was during 2006, favoring a stronger second half.

The primary risks to the forecast is a fall below 106 key support level, during the bond market correction in the first half 2007.

by Nadeem Walayat

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