Forget the Headlines, Listen To the Bond Market!

Let's turn our attention to something that isn't often discussed, namely bonds. I know what some of you are saying already: "But bonds are boring!" Yes, they may well be boring in most instances. But this isn't one of those times. Actually, the message of the bond market is one of the more exciting and optimistic messages being sent anywhere in the financial markets right now and it behooves us to pay close attention to what bonds are saying. The collective message of the bond market is one that is being almost entirely ignored by the financial press. While millions of investors are caught up in the past, cowering under their beds waiting for the next financial bomb to drop, the bond market is screaming to all that will listen, "The worst is over - the economy will improve!" To show you what the bond market is saying, let's look at some revealing charts. To start with, here is the chart of the LIBOR rate for the first three months of 2008. The LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world and is among the most common of benchmark interest rate indexes used to make adjustments to adjustable rate mortgages. As such, it can be used to measure levels of fear among lenders related to the subprime fiasco. The LIBOR rate premium over the T-bill rate has been declining sharply ever since peaking out back in mid-January. When the Libor rate goes up sharply it reflects the intense fear of British bankers over financial and economic conditions, just as it did during the January panic. But notice the Libor rate has been coming down conspicuously ever since then and has not approached the high levels of fear of over two months ago. The public remains afraid, yet the monetary powers are clearly not as worried over the state of U.S. financial affairs as they were earlier this year. Noted economist Ed Yardeni noted back in February that, "ARM resets are less threatening partly because of the Hope Now Alliance (a.k.a., the 'teaser freezer'), but mostly because the Fed has lowered the federal funds rate by 225bps since...

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