The Economy and Bond Market Radar (June 4, 2012)
Treasuries rallied this week, sending yields sharply lower across the long end of the curve. Europe was the focal point for most of the week. While Greece still makes headlines, Spain was more in focus as the government planned to borrow to pay for bank bailouts. At the same time, economic data is deteriorating very quickly. On Friday there were a slew of negative data points as May purchasing managers’ indices from around the world disappointed and nonfarm payrolls grew a meager 69,000.
Strengths
- On June 1, the 10-Year Treasury yield fell to 1.45 percent as investors sought perceived safety. This rate is lower than the Near-Term Tax Free Fund (NEARX)’s 30 Day SEC yield on a tax equivalent basis based on a 35 percent tax rate, even though the fund holds bonds that, on average, mature in less than five years. Click here to see returns.
- Retail sales were surprisingly strong in May with same store sales generally beating expectations.
- Brazil cut interest rates by 50 basis points to a record low 8.5 percent.
- European Central Bank president Mario Draghi supported the idea of a bank deposit guarantee. This would likely help prevent a “run” on European banks.
Weaknesses
- May nonfarm payrolls expanded by only 69,000, well below estimates of 150,000. The prior two months were also revised lower by 49,000. Overall it was a very weak report.
- Global purchasing managers’ data released late in the week also disappointed. China was a negative surprise relative to expectation, while European data just confirmed the weakness.
- April’s pending home sales unexpectedly fell 5.5 percent which casts a shadow on the recent strength in the housing market.
Opportunity
- Bonds continue to grind higher and appear to be forecasting benign inflation and slow growth.
- The Fed appears willing to increase monetary accommodation if necessary, which would be a boost to the bond market.
Threat
- China’s economy is slowing faster than expected and government policy makers appear comfortable with this dynamic.
- Europe remains a wildcard with austerity programs under pressure, creating significant uncertainty.
