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How the Bond Markets React 06.28.05
The Perfect Rate
This week the Federal Open Market Committee will meet for two days and the anticipation around the outcome could swing the economy like no other rate move has in recent memory. A move to the upside has been widely predicted to be the last such move by the Fed for the year. A move to the downside or no move at all signals a less than firm hand on the tiller of the economic recovery. Remember, depending on who you speak with, the economy is either good or bad, growing or stagnating.
The much hailed last inning - which became the vernacular for one more interest rate move - is not even close to what would be considered the perfect rate. At the beginning of the chairman's moderate hikes on the short term overnight rate, the popular consensus fell into a 4% top by the end of 2005. Now with the economy sending so many mixed signals and seeming to slow well before that ideal mark, the Fed has become increasingly worried.
The sympathetic move by the Treasuries ahead off that meeting seemed as if the credit markets were looking for a perfect rate of their own. The 10-year note's yield moved down once again and the average investment grade corporate bond is selling at 5%. And this is without any further help from the European Union's failure to reach a constitutional consensus. Keep your eyes on the German 10 year note as it moves towards a dangerous 3% level.
All of this yield hunting has pushed up prices leaving fixed income investors with no place to hide. But that doesn't stop them from looking.
Taxable municipal bonds have been traditionally cheaper than Treasuries and have remained so - for now. Some folks have pointed toward health care munis; transportation and utility offerings have also lured crossover investors.
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