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March 4, 2005
Mortgage rates are drifting down toward 5.75%, pulled by today's 10-year T-note rally from the 4.41% zone down to 4.32%.
All week long, Treasurys tested but could not break that key 4.41% support level (it has held since last August); if it breaks, all long-term rates would briskly rise toward the next support level a quarter of a percent higher, mortgages to 6.00% or above.
Mr. Greenspan's "conundrum" deepened: why are long-term rates holding a low range while the Fed has raised its overnight rate and obviously intends to continue to raise it? Long Treasury rates are a half-percent lower now than they were when the Fed started to tighten a year ago.
Economic observers taking a whack at the conundrum fall into two camps: those who think long rates are down because the economy will soon slow, and those who think the markets are wrong to be doing what they are doing. Rates are still low, but after today both camps need new theories.
First thing this morning the Labor Department announced a solid, 262,000-job gain in February payrolls. Not the 300K-plus so long awaited, and there is still no growth in wages (only 2.5% year-over-year), but the job market put in a damn good showing.
Yesterday we got news that "same-store" retail sales in February shot up at a 4.2% pace, and word that new claims for unemployment insurance are maintaining their best (low) performance in five years. Earlier this week, the twin purchasing managers' indices stayed high overall, with strong new-order, price, and employment components. Meanwhile, the stock market is off to a four-year high .
In sum, those of us (me too, for sure) who thought the economy is on the edge of a slowdown have been mistaken. Wrong, for short.
The markets-are-crazy camp, led by bond impresario Bill Gross and populated by every insider bond-trading wise-guy on the Street have had two core beliefs: leveraged long positions would soon explode into an avalanche of bond selling, and a general dollar crisis would soon cause foreign holders of Treasurys to dump them.
The leveraged longs (borrow short-term to buy bonds, the "carry trade") are supposed to be the work of hedge funds, the eminence grise of today's Street (accusers are not clear whether the hedgies are black-hat or dunce-cap types). If this week's trading demonstrated anything, there are not huge longs out there; in fact, trading today reflects a market hugely short bonds. The whole fool financial market, stocks included, was leaning to an expectation of an outsize jobs number and break of 4.41%. When it didn't get either, shorts had to buy to cover, hence today's rally in bonds; and the rate rally juiced rate-fearful stocks.
The dollar-panic argument rests on the notion that foreign holders of Treasurys are in the hedgies' bad-guy-dumb-guy brigade. Two flaws are evident: the dollar is down, but not out, and will gain strength if rates rise. Second, American consumption of imports is imprudent, but it is the sellers whose economies are dependent on preserving favorable terms of trade. They are in a vendor-financing box of their own making, not ours, and the box is not only comfortable for them but probably good business, transforming their economies for the better.
In sum, no grand theory is working, except something simple: markets are trading as though we have entered a lengthy era of very low inflation. That theory will gain support if the Fed pauses soon after the next two quarter-point hikes, due March 22 and May 3. If not, rising short-rate pressure will at some point blow up the long end (unless us economic slowdown types turn out to be right by accident).
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