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How the Bond Markets React 11.30.04
The 30-year Treasury?
Almost no one is talking about the 30-year Treasury as a place to park your money. Popular belief has the bond's yield, which moves in the opposite direction of the price, rising significantly over the next couple of years as the Central Bank continues to raise short term interest rates. Numbers as high as 6% plus have been tossed out as a possibility for a year from now.
But that might not necessarily be the case.
If you consider the current economic scenario of a continued increase in spending (the most recent debt ceiling was raised by 1% and the President has some ambitious plans for reforms in the tax code and the Social Security - both of which will cost this country money it does not have at the moment), the fixed income market may have already discounted this news.
What the Federal Reserve is now doing can be called "catch-up" which is very late in coming and may have a harder impact on the economy than previously thought. If that impact does take place, short term rates will cease to rise as the mood switches to wait and see. This will have a positive effect on the long bond as yields begin to fall from the 5% they are hovering around now.
That may just find investors willing to hang in there until 2006 with bonds that yield 4% providing a very nice return indeed.
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