|
March 12, 1993
At least for the moment, the bond market joy ride has run out of gas.
A surprise rise in wholesale prices is the immediate catalyst: in this morning's report, the Producer Price Index rose .4% in February.
Initial Jobless Claims surged 25,000 last week to 376,000, which is difficult to square with last month's healthy labor statistics. February Retail Sales gained a reasonable .3%.
Despite deep drops in mortgage rates, and a bond market bordering on the hysterical, there is still a better case to be made for further declines than for a rapid rise.
While all eyes have been on the Clinton budget, and its contribution to the bond rally, there is another, longer-running, and at least as powerful element.
The yield curve, the graphic representation of spreads between interest rates at diferent maturities, continues to be extremely steep.
Last fall, average 30-year bond yields were about 7.50%, while T-Bills returned 3.00% or less. That four-and-a-half point spread is thought to be the widest in the history of the country.
The spread has narrowed to 3.80%, caused entirely by a drop in bond yields to 6.80%. This "narrow" spread is still nearly double the historical average.
Neat. So what?
Look here. Through the 1980s, you could earn as much in your money market fund as you could by buying a bond ("flat" curve). Since the Fed's panicked easing eighteen months ago, your money market earns practically nothing -- compared to the glory days.
Also, every day a new wad of certificates of deposit matures. You used to get 10% for five years; now you're lucky to get 4%.
What else can I do with my money? Buy mutual funds. Buy in such massive volume that stock prices rise too high to pay a good return.
More CDs mature, cash still earns nothing. Remember when a bond yield at 7.50% looked silly? If stocks are overbought, lets buy some bonds! Whoosh, and down go rates.
In the last eighteen months, about a trillion dollars has washed from cash and CDs into stocks and bonds. So long as cash returns stay below 3.00%, money can chase bonds into the fives, and mortgages into the sixes.
Cash yields will stay below 3.00%, unless there is very rapid economic growth, or inflation, and everybody knows that can't possibly happen.
|
