Bond Market Blues

I hate to spoil the party, but has anyone noticed that the bond market is going down? By that, I mean it’s losing value. In other words, it’s not going up. Bonds are falling. Interest rates are going up, and not just the ones controlled by Team Greenspan. If you have an adjustable-rate mortgage, you ain’t too happy about the bond market’s sudden turn for the worse.

If could have been different. The government had wonderful news for the bond market: They said that they won’t have to borrow as ridiculously much as they had thought. Regrettably, the bond market somehow didn’t take this as gracefully as one would hope.

Perhaps, Asia is getting a bit fed up with our spending habits. That’s certainly understandable. Half of our Treasury debt is held in the Far East. Locking in a 4% yield until 2020 isn’t my idea of a great deal either.

Today’s Treasury auction did not go so well. The government hocked off a cool $18 billion in three-month bills. The yield came in at 3.4%, which is the highest in nearly four years. Another $16 billion in six-month bills went for 3.6%, the highest rate in slightly over four years.

The famous yield curve isn’t curving much lately. At the beginning of the year, the difference between the two-year note and the five-year note was over 1%. Today, it’s down to just 0.25%.

The yield on the 30-year T-bond finally broke 4.5%. Do I hear 5%? (Technically, this is a 26-year bond, but at the rate the government is going, I think we’ll be auctioning off fresh 30-years soon.) The long bond is now at its highest yield in 11 weeks. The 10-year closed over 4.3% today, its highest yield in 15 weeks.

The market’s rally earlier this year was crushed by higher yields. As rates rise, cyclical stocks tend to outperform consumer stocks. I say “tend to,” but not always. Since October 9, 2002, the Morgan Stanley index of consumer stocks is up 26.8%, while the index of cyclical stocks is up over 105%. In fact, it’s surprising how cheap some food stocks are. Sysco (SYY), I’m looking at you.

The stock rally may continue, but it won’t be able to go for long without some help from the bond market.

Posted by on August 1st, 2005 at 8:34 pm


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