Rate Spread May Herald a Bond Rally
Hyman, who correctly predicted in June that the economy simply "doesnÛªt have the legs on it to start a recoveryÛ and as an investment strategy advised buying the 30-year Treasury bond, is simply bearish on the economy.</br></br>He pointed out that so far, with the federal funds rate having declined 66 percent over the past 31 months, lower rates hadnÛªt made a difference. But, if the discount rate were to fall to 3.50 percent, ÛÏNow weÛªre really talking!Û</br></br>Lower rates will make a difference because they reduce the cost of borrowing for consumers and corporations.</br></br>Already, as many investors know, corporations and municipalities have refinanced huge amounts of debt, replacing it with lower-cost issues. At the same time, individuals have refinanced many of their double-digit mortgages with much lower interest rates.</br></br>So far, the lowered rates have failed to ignite major purchases of new homes and autos, which is necessary to bring the economy solidly out of the recession. Hyman believes there are two reasons for this situation.