A few months ago, when the Treasury 10 year note was yielding more than 4%, I told my clients (and the readers of this blog) that I thought that deflation was the bigger concern, and that interest rates would soon be heading lower, not higher. This was not a consensus opinion - no, in fact, I was in a distinct minority.
So now deflation, and lower interest rates, have now become an increasingly popular view. Even the New York Times carried a front page story this morning talking about the need for the Fed to act soon to try to stave off a Japan-like deflationary economy in the U.S.:
A string of developments, including the weak jobs report last Friday, has altered the sentiment within the central bank, leading Fed policy makers to stop worrying for the moment about the increasingly remote prospect of inflation. Instead, they are increasingly focused on the potential for the economy to slip into a deflationary spiral of declining demand, prices and wages.
As I have mentioned numerous times on this blog, any time an opinion becomes a widely held consensus, investors should start thinking about heading in the opposite direction.
And I think this might be one of those times.
Mind you, I still think that interest rates are heading lower - eventually. I also believe that the Fed - and the federal government - needs to act, either through aggressive quantitative easing or another round of fiscal stimulus. However, I think it is unlikely that the either the Fed or the federal government is likely to act in the next few weeks.
But I'm thinking this might be already priced into the bond market, and that we could see a spike higher in interest rates over the next few weeks.
I'm not exactly sure how to play this, but for the time being, I would be cautious about getting too aggressive about setting up portfolios for lower interest rates.
Fed to Meet, With Concerns on Deflation Rising - NYTimes.com
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