Emirates Yield Curve

AEIBOR (Interbank rates) suggest further downside on yields and bond outperformance.
Historical Case
There was a time when society was credit less, as usury laws discouraged lending and penalty for rates higher than the legal maximum was death. Then of course, times changed and interest rates were let free. However, despite the perceived control on interest rates, the monetary tool is a cyclical phenomenon, which does not differentiate between geographical regions. So even Emirates Yield curve i.e. the relationship between term rates can tell us where the global interest rate cycle is placed and where we are headed as a society.
Importance of Interest Rates
The importance of interest rates can never be understated, we keep them too low or they rise exponentially. Richard Mogey, world renowned cyclist said “The whole fabric of the economy is held by two threads, lower interest rate and good weather. If either of these changes in any serious way, the economy, as well as stocks and bonds, will suffer.” Interest rate cycles determine food and energy prices, real estate perform poorly in periods of lower rates and societal risk appetite is linked with it. Consequently, policies that been profitable need a generational (30 years) revamp. Interest rate changes reflect the change in times as we pass from an era of surpluses to an era of shortages.
Cycles and Patterns
Interest rate moves in a 60-year cycles, 30 years of rising interest rates and a similar time of falling rates. Within the long 60 year cycle, the 36 years from 1946 to 1981 saw rising rates. Since 1981 we saw a general fall in long-term rates. Look around; are interest rates low or high? The cycle is overstretched and global interest rates have already bottomed. The current up cycle of interest rates should head up well into 2030. The good news is that interest rates don’t have to go too high to cause innovations and adjustments.
The noted British economic historian, E. H. Phelps and his assistance Sheila Hopkins, traced the patterns of British prices and wages all the way back to 1254 and found patterns. Economic history has its phases.  Another cyclist, P. M. Montgomery (1984) showed that monthly high-grade utility bond yield since 1920 has followed the pattern of the logarithmic spiral. He quoted, “Attempts to predict the future level of interest rates based on conventional economic theory would seem to be a fool’s errand, in as much as such efforts presuppose certain false first principles of science. The central nexus of economics is value, which is not inherent in any physical object, but rather derives exclusively from the human desire for certain particular objects at certain particular times. Therefore, the ultimate subject of economics is not gold or savings account or money supply or houses or any physical goods whatsoever but immaterial mental and emotional states.”
The larger interest rate cycle is made of smaller 40 month Kitchin Cycle, named after Joseph Kitchin a statistician.  Emirates interbank terms rates (AEIBOR) made a low in May 2008. May 2011 completes 36 months, just short of the 40-month cycle mark. Any flight to safety, appreciation in bond prices should be limited to this period. The current view suggests yields should reverse course and start falling again well into 2010.
Intermarket View
Last time we made an unpopular case of recovery. Primary bottoming in equity is a multi-month process. There will be sectors that will lead the recovery. There will be stocks making new lows, while stocks holding above previous lows. Though the current interest rate trends suggest sustained positivity only in 2011, late economic sector cycles like energy and staples should see relative outperformance in the months ahead. The accumulation case we made last time remains valid, but sectorally.
As a rule, interest rate rise during an economic recovery and fall during an economic contraction. A rapid rise in interest rates usually occurs in the late stages of economic recovery, which contributes to the eventual recession. Conversely, rapidly falling interest rates during a recession contribute to the eventual recovery. Interest rates have a tendency to bottom during the early recovery phase. Thus the direction of interest rates is one way to measure then strength or weakness of the economy.
Conclusion
The yield curve provides investors with another way. The short term rates for less than a year were higher than 1-year term rates in Oct 2008. This was when the Yield curve was inverted and signally weakness. Now the Emirates yield curve is normal, the reason for the recovery in 2009. Long term interbank terms rates are still higher than sub-annual term rates, but technical structure across yields remain weak. Bonds should remain a key part of the portfolio in 2010.
Regarding capturing the larger up cycle on interest rates, markets need financial innovations like interest rate ETF’s to capitalize on this impending up cycle on us. Interest rate cuts are proportional in time irrespective of region and irrespective of the period of history studied.  The stock market truth is rarely sweet. It’s harsh, shocking and straight. Understanding the yields is a key but just one part of the larger economic puzzle.