Fidelity is my brokerage. I got this by email this morning:
By Dirk Hofschire, Fidelity's Vice President of Market Analysis
June 02, 2009
Global stock markets posted their third consecutive month of gains in May, capping the best three-month period for stocks worldwide in three decades. Broad-based signs that the economy is stabilizing buoyed investors' spirits, though spikes in Treasury yields and mortgage rates underscored the high level of uncertainty that remains. --Ooh, the best in 3 decades, Dick? Wow. Investors' buoyed spirits wouldn't have anything to do with the historic and unsustainable negativity of a few months ago would it? I mean where were their spirits going to go, down? Ah, treasury yields... now you are adding some content. Let's read on.
Last week, 10-year Treasury yields hit 3.7% before falling back at the end of the week, capping an abrupt rise from just 2.5% at the beginning of the year. Mortgage rates followed the move up, threatening to put a damper on the improved housing affordability that had been providing hope the housing downturn may be nearing a bottom. --Yes, they did indeed. Hey Dick, do you know that I refinanced the modest remainder of my home mortgage with urgency on the day rates gapped down to the lows in December? Why the urgency? Because despite deflation fears of the time, the government's inflate or die mandate dictated that one be hasty to take advantage of a once in a generation opportunity before rising rates begin to reflect lost confidence in the chronic inflator.
The key question for investors is why these rates have moved up. On one hand, rising Treasury yields typically reflect improvement in the economy and a greater comfort by investors to increase their exposure to riskier assets. This is probably a part of the explanation today. Economic data has continued to support the notion that the nation's economy appears to be contracting at a slower rate than earlier in the year (see our report Road to Recovery: Signals to Watch). --Dick, you were doing well to this point. But now, there you go... out with the conventional wisdom that baffles the masses with bullshit (or do you actually believe rates are rising due economic improvement?). Yes, the crack addicts are in full risk mode. You are right there. With the freshly created debt money sloshing around the system, we have been bound to get some less negative economic signs, for the short term.
Hope in the numbers
Last week, consumer confidence rose to its highest level in eight months and initial unemployment insurance claims, a proxy for layoffs, continued to fall from their March peak. Meanwhile, rising commodity prices could signal that China's economy has stabilized as well as a moderating pace of decline in the global economy. --Ah, the old 'China story' is dusted off for another play. Consumers are simply gaining confidence in line with sentiment waves, so predictable and likely so fleeting. The consumer is a lagging hop head wondering where his credit went.
Consumer confidence has been rising but remains well below its recent highs.
Source: The Conference Board, Haver Analytics, FMRCo (MARE) as of 5/31/2009.
As the economy shows signs of stabilizing, riskier asset classes have climbed, continuing a rebound that began in early March. U.S. stocks have jumped more than 35% off the March lows, while emerging market equities have soared about 50%. Riskier bond categories such as high-yield corporate bonds have gained more than 20% in 2009, and commodities have staged a broad rebound. --Yee haw! Let's party!
But economic optimism and a reversal of last year's flight to the safety of Treasury bonds are only part of the reason Treasury yields have risen so sharply. (Treasury bond prices and yields move in opposite directions.) --Wait for it...
Record issuance of new debt by the U.S. government, accompanied by rising concerns about the medium-term outlook for the budget, are also to blame. With yields near record lows and a flood of new Treasury supply on the horizon, the demand from investors -- including the foreign central banks who have been the largest buyers in recent years -- may be waning. --'May be' waning? Thank you for slipping part of the truth into the report after the happy talk.
The Fed's tough spot
Up until the past two weeks, the Federal Reserve, in its extraordinary efforts to push down mortgage rates to help the housing market, had kept a lid on long-term market rates by purchasing Treasurys. But this effort has led to concerns among some investors that this monetization of debt could lead to higher inflation down the road. --Not only 'could' it lead to inflation down the road, the monetization of debt is mainlining inflation right into the veins of FrankenConomy. It is inflate or die, but then, some dark recess of your soul knows that, doesn't it? But let's keep it sanitary for Fidelity's clients.
The yield on the benchmark 10-year Treasury has jumped in recent months but rates are still lower than they were for most of 2008.
Source: Haver Analytics, Federal Reserve Board, FMRCo (MARE) as of 5/28/2009. --Don't give us that 'still lower than most of 2008 crap. The violence with which rates have risen implies something is on the verge of changing in a secular fashion and you, with your conventional 'rates are still low' spiel will be behind the curve and trend following if you do not adjust. There is a secular trend in treasury yields under assault and a long term line of support for the dollar. We have recently hit both and this must reverse... or else.
The Fed is in a tight spot. If it increases its purchases of Treasurys in a bid to keep bond yields low, it may stoke inflation fears, which in turn could reinforce investor demand for higher bond yields. If the U.S. central bank does nothing and Treasury yields keep rising, housing and mortgage refinancing demand could suffer a big hit. Because the housing market remains critical to the recovery for both consumers and banks, this is a real threat to continued improvement in the economy and credit markets. Inflate or die Ben... what's it gonna be?
For investors, the rise in Treasury yields may be more than offset in the coming months if evidence grows that the economy is indeed moving toward recovery. -- It's likely that FrankenMarket will eventually rise on the illusion of economic growth, but gold and eventually commodities will outperform like crazy. You can continue to advise a nice conventional allocation of stocks and bonds, however.
Stocks last week shrugged off the rise in bond yields, instead reflecting the view that riskier asset categories have historically been above-average performers during the final stages of recession. --Or the final stages of a rally easily predicted to the upside and now in its twilight.
However, the sharp fluctuations in the Treasury markets underscore that market volatility is unlikely to disappear as the aftermath of the financial crisis -- and the policies implemented to confront it -- continue to unwind. --Blah blah blah.
Past performance is no guarantee of future results. <--No, really?