The Economy and Bond Market Diary (December 20, 2010)
Treasury bond yields were generally unchanged on the week. However, this was a volatile week as the market sold off early only to rally hard on Thursday and Friday and end flat for the week. After sharply selling off over the past two weeks, the market was likely to stabilize if for no other reason than it had become oversold. Economic data was generally positive this week as the chart below indicates. The Conference Board’s Index of Leading Economic Indicators rose 1.1 percent in November and is just one more positive indication that the economy is turning a corner. The chart shows the economy rebounded in 2009 only to hit a soft spot in mid-2010. The rebound has returned in recent months.
Strengths
- Retail sales rose 0.8 percent in November, ahead of expectations and confirming consumers’ willingness to spend.
- In the manufacturing sector, industrial production rose 0.4 percent in November. Both the New York Empire State Manufacturing Survey and the Philadelphia Federal Index reported better-than-expected results for December.
- The Federal Reserve met this week and reaffirmed the accommodative policies currently in place.
Weaknesses
- Housing starts rose 3.9 percent in November but are still at extremely depressed levels.
- In another blow for the housing market, 30-year fixed-rate mortgages rose 22 basis points to 4.83 percent.
- China continues to incrementally tighten the country’s monetary policy through targeted measures as inflation risks remain.
Opportunities
- After selling off sharply, bonds are at the highest level since May and may offer an attractive entry point.
Threats
- The economy appears to be performing better than many expected and could be a threat to fixed income markets as yields move higher in response.
