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How the Bond Markets React 03.08.05
Acting Against Type
The jobs report wasn't an hour old before a reader wrote me pointing out just how wrong my 100,000 job creation prediction had been. The actual report showed an increase of 262,000, well above the "popular" consensus of 225,000. While that seemed like good news, the number hides some basic weakness in the job markets that will eventually need to be vetted.
I'm not so sure that the number released on Friday is the final number. In fact, I expect it to be revised downward rather than in the opposite direction. Employment is still lagging behind the number of new workers that enter the markets each month. It still does not account for disparaged workers. And it still isn't forcing employers to hire more workers, a costly undertaking that is being impeded by a continued rise in health care costs and pensions.
Employers and fixed income investors were happy that wages remain stagnant and inflation looks to be tame. Those two pieces of news assures a steady increase in short term interest rates. Without any sudden jolts forward by the Federal Reserve Board, bond investors can relax. Or should I say, some of them can relax.
Bond investors who believed that short term interest rates were rising as a defensive move against inflation, moving money into Treasury Inflation Protected Securities or TIPS have not be rewarded for their prediction. A tame inflation picture has not had the desired effect on long term rates, creating that Greenspan conundrum. Bond fund managers are especially worried that comparable benchmarks will be difficult to meet if these long bonds don't have a significant increase in yield. Expected to be above 5%, the 30 year bond has not performed as expected pushing these managers to be right on in not only direction, but timing. TIPS have remained flat.
It is important to remember that prices move in the opposite direction to yield. If yields move up, as is anticipated, prices will fall making municipal bonds and TIPS more attractive as the curve moves away from flat. Conundrums aside, patience may be all a fixed income investor for the long term may need.
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