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August 21, 1998
Take your first two-week vacation in ten years, and look what happens.
In some understatement, it is difficult to prioritize the last two weeks' world events. Start with the markets, the Fed, the economy, then... Lord have mercy....
Treasury bond yields have set new records this morning (mid-'68) but mortgages are holding at the 1998 bottom, low-fee packages 6.875%-7.00%. Mortgage yields are sticky, as investors fear a new wave of refinancings: to date in 1998 $319 billion, already 25% above the 1997 total.
From January until today Treasury rates were relatively stable, held up by the 5.50% Fed funds rate. Today, I believe for the first time since there was a Fed (1907), long T-bond yields fell below the overnight cost of money. The Fed has tightened above bonds many times, but the market has never rallied below Fed funds.
January March June Today
90-day T-bills 5.12 5.15 5.00 4.93
1-year T-bills 5.20 5.40 5.38 5.09
5-year T-notes 5.33 5.73 5.48 5.13
30-year T-bonds 5.68 6.06 5.65 5.42
Why would investors scramble to buy long Treasurys at a lower rate of return than they could earn overnight? First, an immense gamble that our economy will weaken and the Fed will ease. Second, an unseemly scramble for yield. Third, the dominant force in the Treasury market this year: fear.
Responses in order. The economy may weaken, but has not, not yet: housing and consumption in general are screaming ahead. Scrabbling for yield? Never buy anything because you think you have to, or to miss the mob.
Which leaves fear.
One never wants to advocate fear as a sensible investment strategy, but it has its points.
Markets worldwide are having a tough time with yesterday's anti-terrorist spasm. While a strong supporter of retaliation against terrorists, I am an equally determined opponent of the illusion of action by "surgical" air strike -- especially micro soft strike by cruise missile. Israel has raided terrorist camps for 50 years, and gotten nothing but more terrorists for its trouble. There are more terrorists in Sudan and Afghanistan today than yesterday, more hatred of the U.S. in the region, and the world is a safer place for the likes of Saddam Hussein.
An absurdly overvalued Dow is down 256 at this writing. The Asian Contagion is spreading: Brazil's market closed this morning when it hit the 10%-down circuit breaker, and Venezuela is about to devalue. Neither Japan nor Russia has a functioning government. Too many people will never trust another word from our President, and his successor is about to be the object of a special prosecutor. His successor is Newt Gingrich.
No wonder there is a bond buyer or two out there.
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