Big Story: Sharp Interest Rate Increases Last Week

This coming week we will be discussing and modeling interest rates. Ironically, during the first week of class, the 10-year bond rate went all the way from 4.77% to 4.88%, an eleven basis point increase. That might not sound like much, but it is significant, especially since mortgage rate changes tend to be highly correlated with movements in the 10-year bond rate. Expect to see higher mortgage rates reported next week. Read this story to see more about this.

What we will see this coming week in our model of interest rates is that stronger economic growth pushes interest rates higher (other things being equal). That is what happened Friday, with stronger-than-expected reports on Durable Goods and New Home Sales. There was strong economic data earlier in the week as well.

You can plot the 10-year bond rate on StockCharts.com using the symbol $TNX. Follow the handout material I distributed on Thursday, switch to OHLC bars, but customize the time period (change RANGE) to Select Start/End, and use the time period Jan 22, 2007 through today (that will be Friday). Click on UPDATE. You will see the following graph (without the comments embedded). Click on the graph to enlarge it:
















Q: Is this week's run up in the 10-year bond rate due for a pause, or will it just continue?
A: Use technical analysis to provide an answer to this. Note in the graph how the "interest-rate bulls" (which we will see are actually bond market bears, since higher interest rates mean lower prices) dominated this market from Tuesday - Thursday, as the close each day exceeded the open. On Friday, things reversed, as close > open. So, a momentum shift occurred on Friday. We can also use the RSI indicator to help with this (see handout I gave). First, change the default value on RSI from 14 to 9. I highly recommend that you use 9 in the future. As of Friday, we can see that the momentum had shifted, based on the above discussion, AND the RSI was in the overbought range (RSI > 70). This indicates the likelihood of a short-term pause. IT DOES NOT GUARANTEE ANYTHING, HOWEVER!! We will see if this is what occurs next week.

Q: If the 10-year rate does decline, where is it likely to move to?
A: SUPPORT.

Note that by not just following the close each day, but looking at the high, low, open, and close, we are provided with a great deal of added information and insight. While Friday's close was higher than that of Thursday, the fact that on Friday, the close fell below the open, provides a critical insight that you just can't see by restricting focus (as so many persons do) to closing value only.