Tuesday, September 20, 2005

Greenspan Tests the Bond Market

I thought the Fed would pause in its policy of interest rate hikes. I was wrong and instead the Fed raised the funds rate 25 basis points.

This was exactly what the market was expecting. Moreover, the naive expectation after such a move would be that bond prices would fall and that interest rates would rise across the board.

So the Fed's action gives us a chance to see just how strong or weak the underlying condition of the market is. Greenspan is testing the bond market.

The hourly chart above is an updated picture of the pit trading in the December t-bond futures. The spike downward actually occurred before the Fed announcement. Since then the bonds have rallied sharply and have traded above yesterday's high. I think this action has bullish implications and strengthens my view that the market is headed up big from here. The bond market bulls have passed Greenspan's test!

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