If you've worked at a trading desk on Wall Street, you know the morning drill.
There's the paper on the train, the stop off at the coffee cart for that first morning jolt. Get on the elevator, get to your desk. Check on the news from overseas? Nah, check out the sports scores that didn't make it into the bulldog edition of the paper. Then it's on to the numbers, as you try to get a handle on which way the market's going to open. Take a look at those futures. What's the
Treasury market doing, what's moving on
? Same as it's always been, same as it always will be.
Except for that Treasury market part. Late in January, Treasuries began rallying -- not because of a change in the economic landscape, but because it had become clear that the government would be paying down its debt, inevitably reducing supply. The longer-term Treasuries -- particularly the then-benchmark 30-year -- rallied the most, because those were the ones that were going to get cut back first. "The 30-year is turning into an antique," explained one bond trader at the time, "and it's getting priced like one."
30-Year Treasury Yield
From that point on, you couldn't be sure a move in the benchmark Treasury was due to something fundamental, or simply supply issues. The good minute-to-minute economic read the 30-year was supposed to give you just wasn't there.
"I used to have a chart of what the 30-year was doing," says Sam Ginzburg, senior managing director of equity trading at
. "That chart's off my screen. All my traders here, it's off their screens."
If you can't look at the 30-year to get a read on what the economy is doing, what can you look at? Most people consider the 10-year the benchmark Treasury now, but that doesn't mean it's made it on to Ginzburg's screen. The 10-year also has supply issues, though not to the same extent as the 30-year, and has also rallied hard off its January low.
The recent action in Treasuries has created problems not just for people looking for a quick take on the economic events of the day, but for people who are looking further out. For many strategists, long-term Treasuries have been an important factor in determining what the appropriate value of the stock market is. Treasury yields represent a risk-free return, and because stocks obviously involve risks, they must offer some higher return (1%, 2% -- it will depend on the model) than Treasuries. Hence the strong historical correlation between the equity and Treasury markets. When Treasuries rally, the yield -- the risk-free return -- goes down. Stocks start looking more attractive and stocks rally.
At least that's the way it used to be.
"With the Treasury seemingly artificially low in yield because supply is starting to shrink, you call that into question," says Mickey Levy, chief economist at
Banc of America Securities
. "Even for those who like to look at interest rates
monetarist, isn't one of them -- but that's a different story, the Treasuries provide less information than they used to. Even
Alan Greenspan looks at the corporate bond now."
Corporates Less Than a Perfect Replacement
But corporate bonds, unfortunately, are not risk-free instruments. Companies can go under, debts can go unpaid. (Arguably, the U.S. government could default on its debt. But if that ever happens you'll have more to worry about than figuring out what discount rate to use for stocks -- like making sure you have enough canned corn and shotgun shells.) In part because of this, and in part because they have supply issues of their own, corporates have not always run entirely in line with long-term Treasuries. Trying to derive a discount rate from corporate yields is simply not as clean as looking at Treasury yields.
Moreover, looking at corporates is really a matter of preference. Levy says that (if he were the kind of guy who watched interest rates) he would probably look at the swap market. Tony Crescenzi, the chief bond market strategist at
, suggests the two-year Treasury gives a good read on
Fed and economic expectations, and
chief quantitative strategist Rich Bernstein also thinks the shorter-term Treasuries are worth watching. At
Salomon Smith Barney
, equity strategist Jeff Warantz says he and his colleagues "have been toying with the idea of looking at some of the agency debt," issued by quasigovernmental entities like
All of these instruments say important things about the economy, some better in one instance, some better in another. But all of these different reads give at best a difficult and complex message, at worst a mixed and contradictory one. Bond traders and economists are able to suss out the message in the market (or should be able to -- it's their job), but others no longer have the quick, rule-of-thumb read that they used to.
"It was easy just coming in and looking at the 30-year," says Ginzburg. "Now I have to be in touch with our bond guys -- I'm smart enough to know to let someone who's smarter than me tell me what's going on in that market."
But Ginzburg wonders about all those people who cannot, like him, simply shout across the desk to get a sense of the nitty-gritty on the day's economic news. In general, investors don't have anywhere near the sense of what's going on with the economy that they used to. With the 30-year off of everybody's screen, the stock market has, in a sense, lost its economic rudder.