Watching the bond market these days is a bit like watching Rover chase his tail. There’s a lot of spinning and swirling, and a vase or two gets knocked over, but Rover never finds resolution. The fixed-income set too seems to be spinning its wheels a lot lately but just can’t decide if the economy will grow or contract. Depending on the week, one or the other sentiment prevails until some bit of news emerges to reverse the trend.

The current thinking among the fixed-income set is that the economy will weaken, or so suggests the 10-year bond yield’s decline since August 8, when the benchmark Treasury was priced at roughly 4.4%. Today, the ten year closed out the session at about 4.17%.
If there’s a logic to any of this it seems to be that transitions take time, and cause more than a little anxiety along the way for those desperate for clear signs of what lies ahead. Indeed, the great secular decline in the 10-year’s yield has been in a holding pattern for two years, bouncing within a range of roughly 3.1% (which was briefly touched back in June 2003) to 4.9% in June 2004. The range has since tightened up, but the bouncing continues unabated.
It used to be different. From 1981 through the first half of 2003, a persistent, if at times sidetracked secular bull market in bonds kept the 10-year’s yield on a fairly stable path of decline. (It’s easy to say that with the benefit of hindsight, of course, but we’re saying it just the same.). But in the wake of the sideways trend of the last two years, strategic investors are wondering how long the range-bound meandering can last, and whether the new world order will deploy further yield declines or exactly the opposite.
It’s an old question, and one that CS has struggled with for some time. But what’s old is new. Alas, we don’t have any more insight into the future today than we did yesterday, but we still have eyes in our head.
On that note, this morning’s news on July’s durable goods orders has added fresh excuses to continue buying Treasuries, which reduces yields. New orders for manufactured durable goods dropped 4.9% last month, the Census Bureau reports. That’s the first monthly decline since March, and the steepest fall since January 2004. Economists generally were predicting a fall of just 1.5%.
Yes, the durable goods report is a volatile beast, bouncing around in any given month. But the magnitude of the drop, along with the far-deeper fall than the consensus outlook called for, has caught the attention of the market. “When it misses by this amount, you have to accept the volatility and still be concerned,” Barry Hyman, equity market strategist at Ehrenkrantz King Nussbaum tells MarketWatch.com.
At the very least, capital spending has taken a breather. Does that mean it’s time to run for the exits and sell stocks and buy bonds? There was, in fact, a bit of just that today. Not only were traders chasing Treasuries, they were selling stocks, to the tune of a 0.6% drop in the S&P 500.
But if there’s signs of trouble brewing when it comes to capital spending, optimists prefer to look at today’s report on new home sales for July to perk up investing spirits. Sales of single-family homes rose by a sizzling 6.5% over the revised June number, the government advised today. As we’ve come to expect, the latest measure of the demand for housing was another new all-time high.
The economic news today was clearly one of a mixed message, but in what may be a sign of the times, traders decided to focus on the negative. Does the pessimism have legs?

3 thoughts on “HOME ON THE RANGE

  1. DMWGR

    A large subset (Portfolio Players….Gross @ PIMCO) of the fixed-income community continues to be fixated with what it “wants” to happen, positions themselves accordingly and then attempts to “convert” those who are indifferent to adopt their market view. This approach has not, is not, and will not work. This “Hero” or “Goat” approach to playing the fixed income market is problematic.
    The fixed-income market is primarly driven by “relative values” (i.e. Yield Curve, Spreads, Etc.) not absolute market direction. The sooner the fixed-income investor/trader understands that fact, the sooner they will be indifferent to market direction and more focused on relative value.

  2. lotek

    …there is no reason to fear the inverted yield curve; better to be prudent and enjoy the safety of very short term paper…
    Mr. Greenspan and Co. will continue to boost your real return while speculators play the game (in long-bonds). “Big” U.S. money movers will be correct eventually, but in the mean time even bigger international funding doesn’t seem to care about long-bond yield…

  3. Mans

    The big buyer of our long term debt are Japanese and European Investors. Long rates in Japan and Europe remain at historical lows. Compared to rates of 3.16 and 1.45, our 10 year yield at 4.19 looks scrumptious.
    Throw in a dollar trending somewhat higher and the conundrum becomes a little less conundrous.
    With 2/3rds of the G3 overnight rates pegged close to zero (2% in Europe, quantative easing in Japan) the Carry trade lives on!
    With negative real interest rates in Euro/Yen the source of the Savings Glut also becomes a little more obvious.

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