By having reversed slightly more than 50% of the 2-month sell-off that took
place between Dec. 4 and Jan. 29, the bond market has crossed
into territory that suggests it is beginning to rethink its recent
elimination of near-term rate cut odds. Treasury yields had increased from
4.42% to 4.89% during the sell-off, which puts the half-way mark at 4.66%,
where the 10-year just crossed.
The spark behind today's rally are the
comments made by San Francisco President Janet Yellen who said that if the
Fed were to raise interest rates, it would add risks "we should not take."
Her comments are at odds with the Federal Reserve's rate hike bias and will
hint to some that the Fed is leaning toward removing its bias and perhaps
considering changing it to a rate cut bias.
Yellen's comments are amplified by comments from former Fed Chairman Alan
Greenspan, who, in response to a question about whether or not a recession
is possible this year answered in the affirmative. Greenspan likely was
speaking in terms of statistical probability and he did not assign any
numbers on the chances for recession, so it is a stretch to say that
recession is something that Greenspan considers a strong possibility.
Adding to the bond rally are the expected changes to widely followed
fixed-income indexes such as the Lehman Index. The duration level (average
maturity) of these indexes will rise more than usual at month's end, owing
to the inclusion of the Treasury's recent auction of 10- and 30-year
securities. This will force index managers to raise their duration levels
in lockstep, requiring the purchase of longer-dated maturities.
Even before Yellen and Greenspan spoke, the bond market was poised to lower
its economic growth prospects this week, primarily because of the sharp
downward revision expected Wednesday to last quarter's gross domestic
product, which is expected to show a 2.3% rate of gain instead 3.5% as per
the advance estimate.
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Tony Crescenzi Blog Keys to the Week Ahead 2/23/2007 4:26 PM EST Here are the data releases that'll be making headlines next.
Tony Crescenzi Blog Treasuries at Key Level 2/23/2007 1:56 PM EST A yield break of 4.66% on the 10-year would begin to invalidate the selloff.
Tony Crescenzi Blog Inflation Expectations Up 2/23/2007 11:08 AM EST The yield spread between 10-year TIPS and 10-yearTreasuries has widened.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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