|
|
|
|
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 It has been referred to as the birth of the new organic marketplace. I am talking about the lackluster performance of the second quarter, which has been revised and consequentially swept under the rug. But the period was a snapshot complete with a new GDP and a new annual rate of 2.8%. The interesting things about the quarter was no change in monetary accommodations, no tax cuts and no real change in how investors look at bonds - except skeptically. Mortgage cash-outs or in this case, lack of them, are a good sign to the fixed income trade that this is what an unstimuluated economy looks like without any outside sugar coating from Washington or the Fed.
The bond yield on the ten year is now at 4.19% and that has brought out the old Fed model fans and few who are of the belief that it no longer works - if it ever did. What is the Fed model you ask? The Fed had supposed that through a simple algebraic equation that there was definitely a correlation between stocks and bonds, their yields and price to earnings ratios.
The model portrayed the relationship as a sort of three-legged race with one marketplace unable to outpace the other. Now that those yields are significantly off their 6.5% mark in early 2000, there is concern that stocks are significantly undervalued. Maybe, but fixed income enthusiast care little.
The Fed will raise rates in the coming months but the anticipation of those hikes may have become a mote point. If they determine that inflationary pressures have slowed, they may sit on the lead. The August Producer Price Index showed no real signs of strength and this may just sway the Fed to wait for another sign.
For those willing to take on a little bit of risk, emerging markets are providing heart quickening returns of late. But are they worth a look? Quite possibly and the reason is simple. Latin American countries have made major inroads in closing the gap between exports and international borrowing to finance their businesses. But investors should be well compensated for their risk and that may not be the case as the quality of the ratings on some of these bonds improve. The problem for those hungry for above average returns might not like the spread between corporate US rates (averaging 7.28%) and countries with questionable credit quality, political and economic uncertainty and returns that should, because of the aforementioned reasons, be double digits.
|
