|
|
|
|
Who We Are
Money Focus Mutual Funds Insurance Mortgages Taxes Step by Step Hot Topics Contact the Editor
Featured Site AfterHourTrades.com, Inc. Featured Columnist: |
How the Bond Markets React 02.07.05
Jobs, but Less of them
The Federal Open Market Committee met this past week and predictably raised the key short term overnight rate. But what made the bond markets sit up and take notice was the jobs number.
Some consensus figures reached for 300,000 (although most predicted 200,000) new jobs in January, a month many saw as troubled by weather related issues in much of the country and specifically in the northeast. They were wrong.
That month saw an increase of 146,000, a number that does not even keep pace with the growing workforce. In order to keep pace with the population, 150,000 jobs need to be created.
While equities rallied on the news, which was hard to explain, bonds also rallied sending the yield on the Ten-year Treasury plunging in typical bond fashion. Settling Friday at 4.07% and the 30 year bond now at a near low set in June 2003, the worries that cause such a precipitous drop are hard to determine, largely because there are so many choices.
In June 2003, the talk was deflation, an inability for producers to raise prices. In January 2005, it could be just about anything from the falling dollar, the two deficits, or the continued availability of cheap money for mortgage refinancings. Prolonging the housing bubble, while being regional, is still putting a strain on fixed income investors.
Inflation may be rearing its ugly head as well and that would get the attention of the Fed chairman.
There are several events happening in the coming weeks. The G7 meeting of industrial nations will continue. Greenspan spoke last week and offered some softer criticism of the administration's fiscal policies than the one he delivered in November. The Chinese currency valuations will be considered by the group as well but don't expect any changes in how they peg their currency.
The numbers from the Treasury auction will also be released this week. This little report, once relegated to semi-importance now has everyone's attention. How much will the foreign investor buy this month, as we continue to issue more debt with any change in how we plan on paying it back? Any fall-off will send alarms throughout the fixed income world. Any increase will allow the bond markets and the White House to breath a little easier. Although they sometimes view strong foriegn investment the same way they interpreted the vote, it should not be a mandate to cotinue to spend with abandon.
And the following week, the Fed chairman Alan Greenspan will pay his semiannual respects to the Finance Committee on Capitol Hill. While the Humprhey-Hawkins testimony is no longer required, Greenspan keeps up the tradition. He sometimes uses the forum to air his opinions about fiscal (ir)responsibility but he has taken some of the stinging rhetoric out of his speeches in recent years.
In other important fixed income news, the Securities and Exchange Commission is forcing greater transparency on the three largest credit rating companies. For years, investors have used agencies such as Standard & Poors, Moodies, and Fitch as the source for objective ratings of debt offerings.
What investors were unaware of was the fees that were collected from these debt issuers may have created conflicts of interest. With the debt industry far surpassing the stock offerings of many of these companies - $1.2 trillion in debt compared to $146 billion in stock with another $1.4 trillion in mortgage backed securities - and with more an more average investors looking for higher yields, the need for more transparency is not only needed, but long overdue.
|
