The Economy and Bond Market
Treasury bond yields fell this week as safe haven buying returned due to concerns surrounding the unrest in the Middle East and North Africa, continuing European debt issues and the potential for slower global growth due to higher oil prices.
The graph below shows the 10-year Treasury yield has remained roughly unchanged over the past three months. Yields moved higher after the Fed announced QE2 in early November but the market has been in a tug of war recently, pitting investors who are betting on stronger global growth and those believing that the obstacles to sustained global growth will be difficult to overcome.
Strengths
- Retail sales for February rose 1 percent and January’s data was revised higher as the consumer is still spending even in the face of higher gasoline prices.
Weaknesses
- European debt troubles resurfaced this week with Moody’s cutting the credit rating of Greece and Spain. The news sent bond yields higher across the region.
- Consumer confidence dropped, with both the University of Michigan consumer sentiment and IBD/TIPP Economic Optimism indices falling sharply.
- Nearly one in four mortgages are underwater as prices of residential properties continue to fall in many markets.
Opportunities
- In an interesting twist, higher oil prices may actually act as a deflationary force if they materially slow global economic growth.
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.
