Does the Bond Market Rule the Country?

I’m a fan of predictions markets, although I think they’re mostly just for fun. There is, however, some evidence that one of the best political markets is the bond market—specifically—short-term interest rates.
The direction of short-term interest rates has had a fairly strong correlation with the political environment of the electorate. I should warn you that this is a soft relationship, and not to read too much into it. But as short-term interest rates rise, the country generally turns to the right. Conversely, when rates fall, the country shifts to the left. Generally,
It’s not that the Federal Reserve “pushes” the country in either direction, but instead, the electorate is reacting to the same things causing the Fed to act. Few things make a country more conservative than a bout of inflation (google Weimar and Germany for more details). The value of a country’s currency is one of those weird mystical bonds that connect a citizen to the state. When that gets ruptured, people don’t like it. It’s almost like a daily referendum on the legitamacy of the state.
Here’s a chart showing the change in short-term interest during the last five GOP-heavy election cycles. The elections were 1966, 1978, 1980 (a particularly crazy time), 1984 and 1994. In each of these elections, voters went to the polls facing higher short-term rates. I’ve also include the current cycle.
image274.bmp
Here’s the GOP gain in the House in each of those cycles:
1966……………………47
1978……………………15
1980……………………34
1984……………………16
1994……………………54
James Carville once said that if he could be reincarnated, he’d want to come back as the bond market: “You can intimidate everybody.”

Posted by on October 11th, 2006 at 10:52 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.