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August 11, 1995
The bond market escaped all sorts of potential disasters this week, and mortgage rates are unchanged, still in the low eights at "zero and zero" prices.
The principal precipice was the Treasury's largest borrowing ever in a single week: a little more than $42 billion in new cash. No problem; the new bonds sold without needing a rise in rates to attract buyers. Other might-have-been pitfalls were reports on inflation and retail sales. No sweat there, either. There was no gain in producer prices at all, CPI rose only .2%; and a .1% drop in July retail sales canceled a healthy revision upward for June.
"Unchanged" doesn't adequately describe the stability in rates since mid-July. The bond and mortgage markets have had all the excitement and drama of drying paint.
Thirty-year mortgages have held between 8.125% and 8.25%, while thirty-year T-bonds rattled between 6.85% and 6.95%. Yawn.
Action is missing, and so is trend. Straight 50-50, no bias, no lean, no distortion; the higher-lower future is pure guesswork.
All right. Let's guess.
Higher.
Bond people are the Eeyores of the financial world. Their preference for bad news runs to expectation that all news will be bad. Some bad news makes money for them: unemployment, bankruptcies, falling prices, recessions. News which is good news for everybody else, like a healthy economy, costs traders money.
An "all news is bad news" attitude adds a special, depressing zest for traders in a trendless bond market. If they think about it long enough, they finally figure that the trend at the end of trendless is bound to be bad. The line they repeat to each other about buying bonds under these circumstances goes like this: "If it isn't getting better, why own 'em?"
How might things get better? Traders would need some bad news, like the economy falling below the 2.5% growth rate expected into next year.
It's hard to make a case for a new episode of weakness. Unsold inventories of everything from houses to computers have been worked off. Preliminary indicators for August jobs look good. The Fed may not have any plans for big easing, but they've stopped tightening. Lord knows the stock market is excited about something.
To build a case for weakness you have to believe that the Fed has done more damage than we can yet detect; or that proposed spending cuts will bite quickly (if enacted); or buy into one of the global scenarios: deflation triggered by Japan, recession in Europe, NAFTA-related collapse in tradeŠ.
Not likely. And stability tends to deteriorate.
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