The Economy and Bond Market Radar (March 5, 2012)
Treasury bond yields were mixed this week as the short end of the yield curve fell slightly while the long end was essentially unchanged.
Global economic data was mixed with a slight positive bias. Purchasing managers indices (PMIs) were released in many countries around the world this week with PMIs improving in China, but U.S. manufacturing cooling in February. The European Central Bank completed another round of Longer-Term Refinancing Operations (LTRO) funding this week, lending over $700 billion in 3-year loans to eurozone financial institutions.
The effects of the LTRO program can be seen in the chart below, which shows the yield on the 10-year Italian government bond. The first tranche was issued in late December and effectively eliminates a near-term liquidity event as banks are able to lock up as much funding as needed with the relatively long term 3-year loans. The drop in yields is remarkable and also coincides with the ârisk onâ trade in equities.
Strengths
- China February PMI is at 51, indicating economic expansion.
- U.S. auto sales were very strong in February with Chryslerâs sales rising 40 percent and Fordâs rising 14 percent.
- Retail sales were also generally better than expected as warm weather helped lift sales.
Weaknesses
- January durable goods orders fell 4 percent, which was the biggest drop in three years. Orders were likely pulled into December due to tax incentives that expired at year end.
- Indiaâs GDP grew 6.1 percent in the fourth quarter but that was the slowest growth in three years.
- The ISM manufacturing index fell to 52.4 in February. While still growing, it was the first decline in three months.
Opportunities
- Fed Chairman Ben Bernanke spoke to Congress this week and effectively indicated no change in monetary policy, which implies continued low interest rates for the foreseeable future.
Threats
- Coordinated global easing from the worldâs central banks should eventually create inflation.
