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How the Bond Markets React For over a month now, the bond markets have done what every other market has. They have taken the lead from the economy and begun to lower expectations that growth, or the gallop that growth once was, has slowed considerably. Each time I sat to write something about this event, a supposedly weekly ritual that was interrupted briefly by a vacation, there would be nothing to say that hasn't been written before.
And there is little to report today as well. With a steady decline in confidence, GDP, spending and on Friday, new jobs growth for the month of July, the bond market has retreated in step with investors. Oil reached a new high today which I believe was a predictable outcome to reasons discussed at length here before, but the lending market is not affected by gasoline prices. I say that with the conviction of someone who has predicted this slowdown long before the oil futures took flight.
While even the Federal Open Market Committee wants to ignore the current trend, they also predicted it as an end result of the ongoing terror threats, the lackluster creation of jobs, and the general fear that keeping the profits close was better than capital investment all harbored the same outcome. The economy was going to slow because of disinterest in spending. And Greenspan pointed this out repeatedly while keeping the money chain well juiced and interest rates at historic lows.
What good is coming from this environment is being used by high-yield investors. While the yields are below what they were a year ago, the risk has been reduced as well with the average high-yield bond receiving a decent credit rating. This has reduced the spread between the average yield of these "junk" bonds to 3.92% over Treasuries. Investors looking for something, anything have increased demand narrowing the spread. When demand for the securities decreases, the spread widens.
The only problem here is an investors approach. If you are not using a bond fund for this type of market, your strengths as a bondpicker will be put to the test.
As the markets wait for those two numbers - jobs which will post little more than 100,000 created with a negative number in manufacturing and the short term interest rate predictably rising .25% - little will be worth doing for the rest of the summer. Tally Ho! for the bondpickers while the rest of us retreat to the shade of cash positions or, even better, let the managers do the work.
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