The Economy and Bond Market Diary (August 30, 2010)
Treasury bonds sold off sharply on Friday, sending yields higher as the market was disappointed by Federal Reserve Chairman Bernanke’s comments regarding the prospect for additional unconventional monetary policy. The market wanted a more definitive commitment and apparently was priced accordingly.
The chart below shows the 10-year Treasury bond, which experienced the sharpest one-day sell off since May. For the week, however, yields were only modestly higher.
Strengths
- Mortgage rates hit a fresh new low of 4.36 percent, the lowest level since records began 39 years ago.
- Credit-card debt fell to the lowest levels in eight years as consumers continue to pare down debt and repair personal balance sheets. While this is negative for near-term spending, it is ultimately what must be done and the process is moving forward relatively rapidly.
- The Fed reiterated its commitment to do what it takes to prevent deflation through additional monetary policy.
Weaknesses
- Second-quarter GDP was revised lower to 1.6 percent from the originally reported 2.4 percent. This was in line with expectations, but does highlight the tentative nature of the economic recovery.
- Housing remains very weak, new home sales fell 12.4 percent and reached a new record low while existing home sales fell by more than 27 percent.
- Ireland’s long-term debt was downgraded this week and credit default swap spreads for the sovereign-debt-burdened “PIIGS” countries (Portugal, Ireland, Italy, Greece and Spain) have reached levels at or near all-time highs. After a lull, investors appear to have refocused on the long-term negative prospects for many of these countries.
Opportunities
- Inflation is unlikely to be a problem for some time and this gives central bankers and other policymakers around the world room for expansive policies.
Threats
- Next week’s economic calendar is full of potential market-moving reports. The most important of these will be next Friday’s job report and Wednesday’s ISM Manufacturing Index.
