The performance of the bond market last week rattled conventional wisdom and led some analysts to suggest cautiously that the 14-month rise in long-term interest rates may be about over.
"I think we are close to a peak in long-term rates," David H. Resler, chief economist at Nomura Securities International, said. "I wouldn't want to argue that we are going back above 8 percent or, perhaps, as high as 8.25 percent. But, unless something unforeseen happens on the inflation front, I don't think we are going much higher than that."
Since the October 1993 trough of around 5.75 percent, bond bTC yields have marched steadily higher. They exceeded 8 percent this fall. Yields on the bellwether 30-year Treasury bond closed Friday at 7.91 percent, the lowest level in more than a month.
Analysts pointed to a number of technical reasons to explain why bond prices rose last week. Banks have been liquidating positions in short- to intermediate-term securities, causing those yields to rise relative to bonds.
At the same time some portfolio managers have been moving money out of the stock market and into bonds. But if one of the oldest articles of faith in the bond market applies, that good news on the economy is bad news for interest rates, then those short-term positive factors should have been buried under the avalanche of positive reports that emerged last week.
From the upward revision in third-quarter growth figures to the latest assessment of consumer confidence from the Conference Board to the November employment report from the Labor Department the message was pretty much the same. Despite efforts by the Federal Reserve Board to slow it, the economy continues to expand at a rate usually associated with rising inflation.
"All of those strong numbers should have sent bond yields back to their highs," said Edward Yardeni, chief economist at C.J. Lawrence.
Seeking to explain the market movement, Mr. Yardeni and others said the rally in the face of strong economic news reflected a vote of confidence that the Federal Reserve would respond to the latest statistics by ratcheting short-term rates even higher. The Fed could decide to do just that as early as Dec. 20, the analysts said, when its policy-making Open Market Committee will meet.
"If this rally continues the market is saying they expect the Fed to be successful and to stave off a rise in inflation," said Joseph Liro, chief economist at S.G. Warburg & Co.