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February 3, 2006
Rates up again. The 10-year T-note is today 4.60%, up .25% in two weeks, the driver behind the rise in mortgages from just above 6.00% to just above 6.25%.
The driver behind the 10-year is a matter of debate and some mystery.
All through this sharp rise in long term rates -- now on a par with the post-2001 highs -- the bond market has behaved worse than the economic data would indicate. Bonds always tend to drop in price and rise in yield at news of inflation, or news of a strengthening economy (the traditional precursor of inflation); and gain in price and drop in yield upon lower/slower news.
Last week bonds got another in a string of housing-slowdown report, exactly the thing that should help bonds, and they faded anyway. The GDP report for the end of 2005 released last week was a statistical weirdo, the alleged 1.1% growth understating the real economy; but the economy has decelerated from the 4% range earlier in 2005. Bonds should have liked the number, but didn’t.
Again, this week, bonds have reacted badly to a string of ordinary data. Yeah, today’s employment data had a pink-of-health 193,000 jobs created in January, an upward revision in last fall’s count, unemployment down to 4.7%, and a best-in-three-years uptick in wages. However, the job market tends to be the last component of the economy to soften in a slowdown.
Bonds ignored the downshifting reports from the purchasing managers’ association, one of the most reliable trend-changing indicators, and again ignored the newest slower-by-the-minute housing reports. The overheated markets in Phoenix, Las Vegas, and broad areas of California and the Atlantic seaboard have all gone flat, and Miami is suddenly drowning in get-rich-quick condos.
Bonds have also departed from another end-of-Fed-cycle pattern, the “inversion” of short rates over long ones. When such an inversion develops, as it did weeks ago, further short-rate pushes by the Fed should deepen the inversion. An inversion is supposed to be the result of long-term investors betting on a recession to come; the higher the Fed, the more likely the recession, and the more reason to buy bonds. Not this time. The Fed hiked .25% this week, to 4.50%, and ALL rates went up with it.
Okay, if bonds aren’t trading on the economy, what’s left to move the market? Two things: a short-term bond-market event, and Fed worries.
The Federal government is back in deep deficit, and the Treasury raises the money to pay the bills in huge auctions of new bonds. In the old days, the twenty years before the Rubin-Clinton-Greenspan-Summers budget surplus, rates always -- always -- rose in the weeks before one of these auctions. The Treasury will sell $47 billion in new bonds next Tuesday-Wednesday-Thursday, including on the last day the first 30-year bonds sold in a decade.
If you missed a chance to lock a mortgage rate last week, you’re going to get another chance next Wednesday, just before the market sucks those new 30-year bonds from the Treasury’s hands and rates in general improve. How long they will improve, nobody knows, but we’ll get a breather.
The Fed. Ten days ago the bond market was convinced that the Fed was “one-and-done” -- another .25% to 4.75% in March, and a gathering economic slowdown would end the cycle. Today the chatter says the Fed will go at least to 5.00%, and 5.50% by year-end. I find this suddenly discovered threat far to convenient in advance of the Treasury auction: the more rates rise now, the more money bond dealers can make after the auction.
The Fed won’t meet again until March 28, almost two months away. Everyone is guessing at the early spring state of the economy, in the markets and at the Fed.
And the best guesser there ever was retired on Tuesday.
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