The Economy and Bond Market Cheat Sheet (May 9, 2011)
Treasury bonds rallied for the fourth week in a row, sending yields lower across the maturity spectrum. The bond market is reacting to a bout of risk aversion as stocks and commodities sold off this week.
The chart below depicts the cost of protecting U.S. municipal debt from default for five years.
The municipal market suffered during the final few months of 2010 and has recently seen renewed interest as investor’s expectations surrounding the potential for widespread default has been roughly cut in half. Credit fundamentals continue to improve as tax revenue increases and fiscal strains appear less daunting than they did a few months ago. The Barclay’s Municipal Bond Index rose 1.79 percent in April and is off to a strong start in May.
Strengths
- Non-farm payrolls rose 244,000, beating expectations and providing some evidence of an improving economy.
- April retail sales were surprisingly strong, rising 8.7 percent year-over-year, helped by a late Easter.
- The ISM manufacturing index fell 0.8 points in April but beat expectations and remains at a very high level.
Weaknesses
- The ISM nonmanufacturing index fell by a shocking 6.5 points in April indicating a rapid deceleration in the service portion of the economy.
- Initial jobless claims rose to 474,000, which is the highest level in eight months.
- India raised interest rates by a greater-than-expected 50 basis points, highlighting the inflation-fighting tendencies from other central banks around the world.
Opportunities
- In an interesting twist, higher oil prices may actually act as a deflationary force if it materially slows the global economic growth.
Threats
- Budget cuts and austerity measures in Europe and the U.S. are necessary “evils” but will likely be a considerable drag on global growth.
