The Economy and Bond Market Cheat Sheet (February 14, 2011)

The Economy and Bond Market Cheat Sheet (February 14, 2011)

The chart below shows the yield on the 10-year U.S. Treasury note. The yield eased slightly this week, closing at 3.63 percent, down one basis point for the week.

Strengths

• Initial jobless claims fell to 383,000 in the week ended February 4, less than the 410,000 forecast. It was the lowest level of claims since July 2008.
• Corn prices topped $7 per bushel intraday for the first time since 2008 after the USDA cut its estimate of corn stocks. Wheat prices also rose to the highest level since 2008 during the week.
• U.S. consumer borrowing rose in December for a third-consecutive month, increasing by $6.1 billion, substantially above the $2.4 billion consensus forecast.

Weaknesses

• The U.S. trade deficit widened in December to a negative $40.6 billion from a negative $38.3 billion in November. The deficit was slightly larger than the negative $40.5 billion consensus estimate for December.
• The average rate on a 30-year mortgage rose to 5.13 percent for the week ended February 4, the highest level since April 2010 according to data from the Mortgage Bankers Association.
• Mortgage applications in the U.S. fell for the week ended February 4. The Mortgage Bankers Association’s purchase index fell 1.4 percent, and its refinancing index dropped 7.7 percent.

Opportunities

• Economic growth remains uneven, and with treasury yields higher than the levels earlier this year (see graph above), it may offer an attractive entry point for bond buyers.

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.