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May 24, 2002
Security concerns outweighed economics, and mortgage rates slid gently all week long, finishing near 6.75%, the effective low of the last eighteen months.
Bond buying exceeded selling as few traders today dare to be short bonds going into a long weekend. Any new terrorism here, a surprise deterioration in the Middle East, an outbreak of war between India and Pakistan, and money will race to bonds, ruining anyone who had bet on higher rates and weaker bonds.
(The gloom is overdone. No threat today, here or anywhere, separately or all added together, amounts to much when compared to conditions before peace with Russia, and in Europe as a whole. Progress, progress....)
Bonds were hurt early in the week by a dollar decline versus the yen (maybe-maybe growth in Japan), and a dollar crash is one of the great hopes of the bond bears. However, the euro isn't going anywhere without a solid European economic recovery, which means Germany, which crept out of recession to .25% GDP growth in the 1st quarter this year, one-twentieth the growth rate in the US.
April orders for durable goods doubled the forecast, but March was awful. Newly-fired workers' claims for unemployment insurance have been stable on the wrong side of 400,000 each week, but there's little hiring on the back side: the total number of benefit recipients has risen in 11 of the last 12 weeks.
By many theories, our renewed budget deficit should be doing harm to long-term interest rates. Not yet: yields on 10-year T-notes traded as low as 5.04% this week, down a quarter percent from highs two weeks ago.
The new, deficit-revealing tax receipt data itself may explain why the increase in Treasury securities for sale has not pushed yields up. US Treasury receipts in April totaled $237 billion, 28% percent below April 2001's $331 billion. If you're looking for a culprit in a $150 billion deficit, you've got two-thirds right there. Increased recession-related spending (see "benefits," above), and cost of living and military increases will get you the rest of the way.
So, the fall in tax revenue is due to Dastardly Dubya's tax cut? Not yet: most of the cuts were back-loaded, the portion the Democrats so desperately want to repeal (and maybe should, but not now). The gaping hole in tax revenue: we're not as rich as we thought we were.
California breaks down its tax receipts into category components faster than the IRS, which will sooner or later find the same pattern in its books. For 1994, before the stock bubble, Californians paid $25 billion in taxes on capital gains and stock options; for 2000, two hundred billion. For 2001, this revenue has collapsed to $75 billion. Anyone who thinks these items will produce even that much revenue for 2002 next April needs to see his or her stockbroker.
The bubble revenue will not soon be replaced by another boom (real or imagined), but that same absence of rapid economic growth makes it easier for the bond market to absorb more debt from the Treasury.
Thin growth means low inflation, gives the Fed no reason for drastic action, and keeps mortgage rates down.
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