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How the Bond Markets React 07.17.05
Not All as it Seems
Now as the stock market has gained ground for the last three weeks running, the yields in the bond market have also crept higher. That jump is credited to strong retail sales and what could be considered - by some and certainly not this column - strong manufacturing data. Which unfortunately leaves Greenspan with little else to do besides raise those short term interest rates yet again. His two and quarter point hikes so far have forced him to keep optimistic about the strength of the economy, wonder at the longevity of low long-term yields, and try to talk the housing bubble down without sounding like a guest on CNBC.
His success in the short term has been muted as most investors are just not finding the yields they seek in Treasuries as worth the attention. Corporate offerings, it should be noted were up last week and have continued to be bright spot for yield chasers as well as offering companies fertile grounds to tap.
Bond investors are still not convinced that all is well in the economy. The persistence of the consumer and the easy financing available have made it all seem increasing illusory. There is still a great deal of sensitivity to interest rates and that could bode badly for equities over the next several quarters.
Inflation will rise. The factors holding it back have already begun to show signs of wear and Greenspan will need to address not only that but the housing risk - a bubble of his own making but one he seems loathe to admit to.
Once long term rates begin to rise - and they will - expect a sudden change in sentiment as the monetary policy begins to constrict.
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