Greenspan Faces Jilted Treasury Market

Like Lucy in the classic TV series, Alan Greenspan has some 'splaining to do. The Federal Reserve chairman needs to come clean before the Treasury market, that amorphous yet incredibly powerful body that is increasingly jittery about his intentions.

Day one of Greenspan's two-day congressional testimony presumably didn't go according to plan: Treasury prices plummeted Tuesday, sending yields sharply higher. Stocks also slipped, but their decline was tame compared with a more-than 1-point decline by the benchmark 10-year note and a more than 2-point fall for the 30-year bond. Nonetheless, this increase in long-term bond yields indicates the yield curve is steepening, a classic signal of stronger economic times.

Because most economists foresee solid growth ahead, "he needed to give a speech explaining why deflation is an imminent problem [and] a super-accommodative policy" is appropriate, said Jim Bianco, president of Bianco Research in Chicago. "He failed [to do so], and the bond market had a heart attack," suffering one of its worst one-day point declines since October 1998.

Of course, had Greenspan focused too much on any deflationary threat, the stock market might have suffered a coronary. At this point, the chairman seems more concerned about satisfying his constituents among equities investors vs. those in bond land.

"He is going to try and pull out all the stops to make sure stock investors make money, the economy keeps moving -- and if bond investors lose bucketfuls of money, so be it," Bianco surmised. (Those investors include those who, according to AMG Data Services, plowed more than $133 billion into bond funds in 2002 and another $45.3 billion in the first quarter.)

It's dangerous for the Fed chairman to treat Treasuries like an unwanted child. Although stocks garner most of the public's attention, the fixed-income market is much bigger and has a far greater influence on the broader economy. Most notably, Treasury yields establish lending rates for mortgages and refinancing activity. Anything that unsettles the housing market, the economy's main ballast for the past two years, is likely to frustrate Greenspan's efforts to get the overall economy back on track.