Interest rates are the “greatest risk” facing the stock market, according to a freshly minted survey of money managers. “The managers rate interest rates above geopolitical events, inflation worries and increasing energy costs as their major source of concern,” according to Frank Russell Company’s June 2005 Investment Manager Outlook. “But they believe higher rates will have a stronger impact on bonds, U.S. Treasuries and real-estate securities—on which they are uniformly bearish—than on stocks.”
This is a curious take on the risks that may or may not harass the bond market in the months and years ahead. But whatever you think of the Frank Russell survey, the bond market to date has little respect for the sentiments espoused in the polling report.
Indeed, the bond market wears its hubris on its collective sleeve these days. With the Federal Reserve scheduled to announce its latest thinking on the price of money (an FOMC interest rate announcement is due this afternoon, Washington time), the yield on the benchmark 10-year Treasury remains under 4%. To say “under 4%” is to reference a rate that’s rarely been that low in the past generation.
But with the Fed once again poised to raise Fed funds by 25 basis points, which would bring the rate to 3.25%, hubris on the part of the fixed-income set becomes that much more of a burden. It doesn’t help the bond bulls to learn that this morning’s latest weekly update on initial jobless claims supports the view that the economy isn’t quietly slipping toward recession any time soon.
Americans workers filing for first-time unemployment benefits dropped again last week to 310,000, the Labor Department reported. That’s the lowest since April 15. Although today’s release surprised economists, who collectively had expected a slightly higher number, the trend of falling jobless claims is par for the course, according to a four-week moving average of the statistic of late, courtesy of Briefing.com.
If the Fed raises rates again today, as many expect, the next hurdle for the bond market is weighing the odds of how long the game could roll on. For perspective, more than a few observers of the economic scene have recently been predicting that the current trend of interest rate hikes has come to an end. But as the economic data rolling in continues to suggest continued strength, tightening the monetary strings may still have some momentum yet.
Indeed, at least one dismal scientist today is warning that the momentum could extend into 2006. “We expect the Fed to continue to raise interest rates steadily into next year to contain inflation,” Richard DeKaser, chief economist at National City Corp. in Cleveland, tells BusinessWeek.
In search of clues to suggest otherwise is job one for the fixed income set. For the moment, the challenge is proving a bit tougher than it was earlier this week. Even the oil market’s not giving aid and cover to the bond bulls at the moment: a barrel of oil changed hands briefly this morning in early trading for less than $57, the lowest since mid-June, and down sharply from the $60-plus posted just a few days earlier.
Oil, goes the thinking, can derail economic growth if its price is high enough. Fifty dollars a barrel didn’t do it, and it’s unclear if the recent high of $60 can deliver sufficient drag. No doubt that many leveraged bond bulls are praying for $70 a barrel, and a Fed that’s willing to sit on its hands after a year of rate hikes.
Hope springs eternal, nowhere more so than in the trading pits of the world’s fixed-income palaces.