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Presidents Day Massacre
The blood was actually shed on Tuesday, the day after Presidents Day, but we'll stick with the formal handle for reasons which will come clear.
Tuesday a week ago was the worst single day in the bond market in roughly two years. As always, bonds take mortgages along for the ride. Mortgage rates had stayed in a nice, polite range (7.125%-7.375%) since December, and in two hours reached 7.75% (thirty year yields, stripped of "point and origination" hocus pocus, no matter what you read in the box below).
While capable of lurching all by itself, the bond market is usually driven by news: most often by economic reports, by action or chatter at the Fed, and sometimes by political events.
Political events are hard to trace as causes, if only because bond traders hold all politicians in such low regard. Once in a while, traders abandon their cynical discipline, and allow themselves some positive expectation from Washington.
Many finance types had placed some hope in a Republican Congress. In particular, they had come to expect some sort of budget balancing, and dared to dream that the Republican resurgence might even include the White House.
Not all, or even most financial types are Republicans. There are a lot of people in pinstripes who, like me, 24 years ago had more hair and voted for Mr. McGovern. Wall Street types tend to prefer Republicans out of pure, narrow self interest: inflation is bad for finance, and Democrats equate to inflation.
The bond market began its fade just before the long weekend, when Mr. Clinton demanded a debate at the Fed about
faster economic growth (Clinton in favor). From the perspective of the financial markets, Mr. Clinton's greatest success (only?) has been to leave the Fed alone, free to do its job. His transparent call for easy money drove bond yields on Friday to the highs of the prior 90 days, but not through them; things were still under control.
Presidents weekend. A time to contemplate the talent running for nomination and election, and the condition of the Republican revolution.
On Saturday, polls made it clear that Pat Buchanan would take New Hampshire the following Tuesday. The long weekend gave traders far too much time to ponder the consequences. Traders relieve stress by trading; if markets are closed when a trader wants to trade, stress gets a tad high. Imagine a planeload of people headed for Las Vegas when they're told the flight has been diverted to Salt Lake City.
A cascade to despair. Dole is so weak that it doesn't matter if he wins the nomination: he can't possibly beat Clinton.
The odious Mr. Buchanan is driving three moderates away from the Republican party for every new partisan he finds. He is so offensive to the country as a whole that nomination aside, his mere presence in the party could cost the Republicans both houses of Congress. Anyone who saw Mr. Buchanan's '92 convention performance, which did so much to hasten George Bush's retirement, should be sure to catch his next show in San Diego.
There is no help in the wings. Mr. Forbes has a temporary lead, but is fortunate to have a family business to ease his political unemployment. Mr. Alexander thinks charity can take the place of welfare, and wants a new branch of the military just to guard our borders from illegal immigration (he's the moderate).
No candidate has mentioned the phrase "balanced budget" in weeks.
The central debate of the 1996 campaign is going to be about stagnant wages and slow economic growth, not the budget. In the minds of the markets, the growth-boosting strategies of a re-elected Mr. Clinton and a recaptured Congress will have only one certain outcome: inflation.
Happy Presidents' Day. Sell bonds.
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