The Economy and Bond Market Cheat Sheet (January 24, 2011)
U.S. Treasury yields moved higher this week on disappointing Treasury auctions and looming supply concerns. Economic data was mixed but generally continued to indicate the economy is making progress. The Conference Board’s Index of Leading Economic Indicators (LEI) was stronger than expected and implies a strong outlook in the near future.
Strengths
- Initial jobless claims fell back toward the 400,000 level, posting higher levels the past two weeks.
- Existing home sales rose 12.3 percent in December, the highest level in seven months.
- The American Institute of Architect’s Billing Index (ABI) rose to a three-year high in a positive sign for commercial real estate construction.
Weaknesses
- Housing data was a mixed bag this week with December housing starts falling 4.3 percent. The National Association of Home Builders Sentiment Index has remained at a very low level in January.
- China vowed to reduce credit growth after a surge during the first week of the year.
- Gasoline prices have risen almost nine percent since November 30. This price increase is effectively acting as a break on the U.S. economy.
Opportunities
- The rise in yield on the 10-year Treasury since the October low to levels comparable with those existing in May 2010 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.
