|
|
|
|
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 Now we all know that more jobs, even the sensational number released on Friday with its serious flaws, will create a rate increase come the end of June. Bond traders have already braced themselves for at least a quarter point jump, with another quarter point added in August for good measure. While the quality of those jobs has not been criticized, the number of them, fixed income investors believe, sends the signal that the economy is improving enough to warrant a little tightening. I must say, though, before we begin speaking about yield curves, that the monetary policy may be leaning towards tightening, but the money supply is at or near post 9.11 levels. I am not sure that signifies an absolute trust in the growth as sustainable.
Those expectations have produced a jump in bond yields of a full point. The two year Treasury note is the most sensitive to short term rates. The ten year however, is sensitive to long term beliefs in the economy. The distance between these yields is referred to as the curve. In a neutral economy, these yields run in tandem separated by 2.00% or 200 basis points.
If you were to factor in those two predicted rate hikes with the additional three quarter point hike estimated by year's end, that would take the short term overnight rate to 2.25%. You can almost bank on that. What you cannot bank on is the defensive position of bond traders. Should the curve not flatten out with that amount of "measured" policy shift (currently the difference between the two yields is .13 or 13 basis points), you can expect further tightening well into 2005.
Currently, every form of fixed income investment, emerging markets included, have priced this first rate hike in. Numerous or accelerated tightening would shake the fixed income markets to their collective knees.
|
