The Economy and Bond Market Cheat Sheet (August 15, 2011)
Treasury bond yields fell sharply for the second week in a row as U.S. debt was downgraded by Standard & Poor’s (S&P), European banks were beset with rumors that additional capital would be needed and the Fed stated that short-term interest rates would be unchanged for the next two years. Financial markets were extremely volatile this week, primarily driven by rapidly escalating fears surrounding Europe’s never-ending debt crisis and building concerns that a recession could not be ruled out.
In an interesting twist, the U.S. downgrade appears to have sent investors into Treasuries, sending yields much lower as investors were concerned additional sovereign downgrades would soon follow.
Strengths
- Retail sales for July rose 0.5 percent and got the third quarter off to a reasonably strong start.
- Initial jobless claims hit a four-month low, signaling stability in the job market.
- Foreclosure filings fell to the lowest level in nearly four years.
Weaknesses
- S&P downgraded the U.S. credit rating to AA+. Related agencies, such as Fannie Mae and Freddie Mac, were also downgraded.
- The University of Michigan Survey of Consumer Confidence dropped sharply, hitting the lowest level since May 1980.
- Global economic data remains generally weak. For example, Chinese industrial production was weaker than expected and Indian car sales fell 15.8 percent in July.
Opportunities
- With the economy weak and concerns brewing about an additional financial crisis, the Fed will remain accommodative for some time and bonds appear well supported in the current environment.
Threats
There is a crisis of confidence in world leaders at the moment and the potential for another financial crisis is rising.
