My back is riddled with herniated disks and at various points they are expressing their displeasure today. So I will attempt this close in abbreviated fashion and in a different manner than my normal presentation.
There is an interesting battle developing in the bond market. On the one side stands those who believe that the rebound is real and believe it will lead to a sustainable recovery. The economic rebound will sow the seeds of higher rates as the Federal Reserve responds to the growth by raising rates and unwindng the abundant provision of liquidity which that organization has copiously supplied.
This group would also hold that if the Federal Reserve does not act in timely fashion an ugly inflation will ensue and the bond market vigilantes will raise rates for them.
The other group holds a diametrically opposed view. This group will concede that the economy will manifest positive growth in the current quarter and possibly into next quarter.
But those who hold that view believe the gains will be ephemeral and fleeting as they are production led. Cash for clunkers will (and has) generated sales and purged some inventory. It will lead to increased auto production to replenish inventories but with out continued buying that production can not be sustained.
Sources tell me that there has been a sea change in the thinking of some large insurance companies,pension funds and others who manage liabilities.
Weak retail sales last week as well as the slippage in consumer confidence piqued the interest of these folks. Weak initial claims data today sparked another round of excitement from this crowd. This week is the survey weak for the payroll data. With claims weakening many now believe that the August employment report will manifest greater weakness than was evident last month. The economy will still be shedding jobs at an alarming pace and at a pace not consistent with current inventory replenishment levels.
These investors piled into the long end of the market today. They were large buyers of Long Bonds, off the run bonds and bond contracts.
That is evident from the shifts on the yield curve today. The yield on the Long Bond dropped 5 basis points to 4.24 percent. The yield on the 2 year note increased a basis point to 0.99 percent. The yield on the 5 year note was unchanged at 2.41 percent.
The 30 year bond also outperfored the 10 year note as the 10 year/30 year spread is 81 basis points. That spread closed yesterday at 84 basis points.
There is also some cognitive dissonance within the bond market. TIPS bonds in the 10 year sector are sending a bit of a warning as those bonds are rallying more than the nominal rate 10 year note. The breakeven inflation rate for the 10 year is now 185 basis points. It closed yesterday at 179 basis points.
Conversely, the breakeven inflation rate as measured by 30 year TIPS declined to 214 basis points from 215 basis points yesterday.
Finally, there is a gigantic disconnect between stocks and bonds. Stocks continue to rally and buyers emerge on every dip.
Thirty year bonds and stocks should not move in tandem for an extended period (to coin a phrase). I will put my money on the bond market in this battle.
I wanted this to be shorter and it is longer than usual.
Back to the heating pad.