The Economy and Bond Market Radar (February 13, 2012)

The Economy and Bond Market Radar (February 13, 2012)

Treasury bond yields were modestly higher this week as most of the yield curve shifted higher by 4-5 basis points. Greek bailout discussions dragged on all week without really coming to a clear resolution, which added to the market’s volatility this week.

Economic data was generally benign but we continue to see a positive trend in employment indicators as the weekly initial jobless claim series continues to trend lower, which historically has been a positive indicator for the economy.

Strengths

• Initial jobless claims continue to trend in the right direction indicating the economy continues to improve.
• The Bank of England (BOE) will inject another $80 billion of liquidity as it expands its quantitative easing program.
• Consumer credit grew by more than $19 billion in December and by more than $20 billion in November. This may indicate consumers are more confident in their future and are willing to take on more debt.

Weaknesses

• In December, German industrial production fell 2.9 percent and German exports fell 4.3 percent. The eurozone was obviously weak in the fourth quarter.
• Chinese inflation rose to 4.5 percent in January, which threatens the implementation of economic boosting government policy.
• Japan’s core machinery orders fell 7.1 percent in December.

Opportunities

• The “risk on” trade started to show a few cracks this week and a reversal of sentiment would be good for bonds.

Threats

• With lots of economic data out next week and a trend toward stronger economic data, bond prices could be threatened if this pattern continues.