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June 30, 2000
While there is considerable argument about the degree of economic cooling, the market for long-term bonds and mortgages improved this week.
Thirty-year low-fee mortgages are flirting again with 8.25%, the low of the year.
This long-term rate performance is peculiar.
It is odd in the first case because the Fed is probably on temporary hold, and likley to tighten again in August. Its stand-pat comment on Tuesday:
"...Signs that growth in demand is moving to a sustainable pace are still tentative and preliminary....
"Risks continue to be weighted mainly toward conditions that may generate heightened inflation...."
The group believing in a "soft landing" for the economy found support in weakish data in early June; but the newest figures suggest that the economy merely buzzed the runway. For example, a huge drop in orders for durable goods reported in May has completely reversed in new data.
A second oddity in a good week for bonds: slowdown or not, the inflation data are disturbing. A revision of the 1st quarter GDP data show an acceleration in the "personal consumption index", excluding volatile food and energy prices, from 2.5% at the end of 1999 to 3.5% in the first three months of 2000.
The first quarter was a long time ago in the eyes of the bond market. However, an uptick in inflation will keep the Fed on the warpath even if the economy does slow down.
The third weird aspect of the bond and mortgage market is its impact on the economy. While analysts go on and on about "higher mortgage rates slowing the housing market", the thought is total nonsense. Mortgage rates reached 8.25% last August, ten months ago; and the only blip above 8.50% came and went in May.
Meanwhile, slightly softer housing statistics mask an extremely strong market: home sales the first five months of 2000 are within a percentage point of the first five months of 1999.
Low mortgage rates -- not high, not rising -- are making the Fed's job harder.
The fourth peculiarity in this healthy market for high-quality bonds: the identity of the buyer spending big money, driving bond prices up and yields down.
It's us.
Well, the U.S. Treasury, but the money is ours, shoveled in by the IRS.
I cannot avoid the linkage between this week's rate improvemnt, and a new budget forecast released on Tuesday: the '00 surplus will be over $200 billion; and at the forecast trend, by 2012 the Treasury will have bought back the entire $3.5 trillion national debt.
A buyer like that can... well, move the market a tad.
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