The Economy and Bond Market Radar (August 27, 2012)
Treasury yields reversed course and fell for the week for the first time this month. The catalyst was the Federal Open Market Committee (FOMC) minutes from the August 1 meeting which were released on Wednesday. The minutes implied that unless the economy picks up, the Fed may ease again in the near future. Fed Chairman Bernanke is scheduled to speak on August 31 in Jackson Hole, Wyoming and the market will look for additional clarity.
Strengths
- New home sales continue to climb in July, rising 25 percent year-over-year and 3.6 percent month-over-month.
- Existing home sales also rose in July, climbing 2.3 percent from June. Median prices rose 9.4 percent on a year-over-year basis.
- The Fed’s minutes already imply an easing bias, which is supportive of all risky assets.
Weaknesses
- There was a lot of discussion out of Europe this week regarding the potential for a “rate cap” on European sovereign bonds. While this may be positive in the sense that it stabilizes the market, it forces the market to deal with rumors and unconfirmed stories.
- The California cities of San Bernardino and Stockton are considering adopting radical eminent domain powers to alleviate the local housing crisis and tremendous amount of underwater debt, which helped contribute to weakness in their local economies. The cities would purchase underwater mortgages, impose losses on bondholders and write down principal amounts owed by the borrower. While this approach could negatively impact the owners of mortgage securities, the risk to the municipal bonds held in the Near-Term Tax Free and Tax Free Funds is not anticipated to be significant.
- July durable goods orders rose, but on an ex-transportation basis fell 0.4 percent, and on that basis are down four of the last five months, indicating a weak overall trend in manufacturing.
Opportunity
- Both the Fed and ECB appear ready to implement some form of quantitative easing in the very near future.
- With further weak economic data out of China, odds of additional easing measures continue to move higher.
- Interest rates are likely to remain very low for the foreseeable future.
Threat
- Europe remains a wildcard with the markets shifting focus on a weekly basis.
- China also remains somewhat of a wildcard as the economy has slowed and officials appear in no hurry to take decisive action.
