Bond Market Close August 20 2008

August 20th, 2009 4:01 pm | by John Jansen |

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.

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  1. 14 Responses to “Bond Market Close August 20 2008”

  2. By Danny on Aug 20, 2009 | Reply

    Hi John,I feel your pain, literally. I also have a back which “is riddled with herniated disks”. have had them for several year now.
    1.- Walk as much as you can, it can be painful, but do it.
    2.- When not walking, try to be flat on your back, maybe a cushion under your knees.
    3.- Just to be informed, read “Healing Back Pain: The Mind-Body Connection” by Dr. John E. Sarno.
    4.- if you can, get an Inversion Table, I recently bought one, the feeling good. It is more for “maintenance” rather than for curing acute pain, but it works!
    5.- Hot showers, plenty of hot water on your back
    6.- and yes, Aleve Gel Caps…

    feel better.

  3. By Farah Fawcett on Aug 20, 2009 | Reply

    Great comment. You were 99% right on your TLT trade from the other day. It was a matter of 1 more day (1%). Thanks!!

  4. By John Jansen on Aug 20, 2009 | Reply



    I have had varying degrees of pain for 20 years

  5. By jg on Aug 20, 2009 | Reply

    Very nice analytical summary.

    Get better, sir!

  6. By Susan on Aug 20, 2009 | Reply

    Wondered about your thoughts on this:

  7. By Gary on Aug 20, 2009 | Reply

    Ice, my man,ice. Heating pads make bad backs worse.

  8. By Al on Aug 20, 2009 | Reply

    Real buyers of the stock market are currently on the beach. But they’ve got some real problems with relaxation, and ready to send the SELL order any second to realize profits they’ve got since March.
    It’s not If but When they’re gonna do that and who’s gonna be the last holding the bag because there’s no real recovery. esp looking at the recent data.

  9. By K T Cat on Aug 20, 2009 | Reply

    Hope you’re feeling better soon.

  10. By Jonathan on Aug 20, 2009 | Reply

    John, Sorry to hear about your back. I find that Ibuprofen and fish oil helps me a lot.
    Thanks for all your posts!

  11. By Chicken on Aug 21, 2009 | Reply

    Excellent commentary once again John, thank you.

    To expound on Jonathon’s fish oil comment, I’m certain he meant to say ingestion of fish oil. I remember reading this somewhere in the distant past and the passage had some detail, I think about choosing quality.

    Get well!

  12. By Bman on Aug 21, 2009 | Reply

    The Bond market leads – 2’s have compressed back towards 1% – equity market will roll over. Feel better John.

  13. By frankl on Aug 21, 2009 | Reply

    outstanding comment and all the moreso considering your back-anguished condition

  14. By Phaesed on Aug 21, 2009 | Reply

    Hope your back feels better, thank you for posting this.

  15. By DS on Aug 21, 2009 | Reply

    Get well soon.

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