The Economy and Bond Market (December 27, 2010)
The yield on the 10-year U.S. Treasury note increased by 6 basis points in this holiday-shortened week, rising to close at 3.39 percent.
November new home sales data released on Thursday showed that new home sales by builders increased by 5.5 percent to a 290,000 seasonally-adjusted annual rate from a revised 275,000 pace in October. November sales were below the consensus forecast of 300,000. The graph below shows that new home sales appear to be bouncing along a bottom, far below the levels existing in 2000 through 2006.
Strengths
- November durable goods orders, excluding transportation, increased 2.4 percent from October, topping the 1.8 percent consensus forecast.
- Initial U.S. jobless claims in the week ending December 17 dropped to 420,000 from 423,000 the prior week, matching the consensus forecast. The number of continuing claims dropped to a two-year low at 4.064 million.
- Personal income in November increased 0.3 percent, above expectations of 0.2 percent. Personal spending in November rose 0.4 percent, slightly below the 0.5 percent consensus, but the fifth-straight monthly increase in spending.
Weaknesses
- Third quarter gross domestic product (GDP) was revised up to 2.6 percent from the prior estimate of 2.5 percent, but it was below the 2.8 percent consensus.
- New home sales in November were up 5.5 percent to 290,000, but below the consensus forecast of 300,000.
- Applications for mortgages posted the biggest decline of the year in the week ending December 17, decreasing 19 percent. Refinancing fell 25 percent, and purchases were down 2.5 percent.
Opportunities
- Since the October low, the 10-year Treasury yield has risen to levels comparable to May 2010, which may offer an attractive entry point for bonds.
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.
