Growing caution by lenders and unsettled conditions in financial markets more generally are likely to be restraining aggregate demand in the future. Against this backdrop, further easing of the stance of monetary policy was judged to be warranted to sustain economic growth in the context of contained inflation.
Remember that? It's what the
Federal Open Market Committee
said last year when it did that surprise, intermeeting interest-rate cut on Oct. 15. And no sooner had the deed been done than any number of Cassandras started talking about how some massive credit implosion was imminent, something that would make
Long Term Capital Management
seem innocuous as a common cold. The Fed eased, went the chatter, because it was wise to what was about to happen and sought to soften the blow.
Asian-spawned deflation was scudding toward U.S. shores. Japan was in a death spiral. Europe was on the verge of recession. The world was falling apart and the Treasury market was the place you wanted to be.
Or so people thought.
In truth, the Treasuries were about to enter a bear market surpassed in recent history only by 1994's vicious selloff. There was not another LTCM. Global growth had reached its nadir -- even Japan was on the upswing. Worldwide demand grew. Leading inflation figures began to look worrisome. In June, the Fed took back one of its cuts; in August, it took back another. Now, one year after that intermeeting move, there is even some talk about the Fed having fallen behind the curve. There's not much love for the bonds.
The Worst Year in Bonds Since '94 ...
And just as last year, when all that ardor for Treasuries marked the top, maybe the current negativity -- exacerbated today by rumors of impending rate hikes -- means that a bottom beckons.
Mike McGlone, vice president of trading at
Aubrey G. Lanston
, compares the current mood to the 1994 and 1997 bond markets. "There's no light at the end of the tunnel. The Fed's going to tighten -- the kind of market sentiment we've seen recently is similar to those lows."
There's some evidence to support this. The
poll of investment advisers shows that sentiment in the Treasury futures market has cratered this year -- as of Friday, only 19% of the advisers were bullish on bonds. That's even lower than the levels reached in 1994.
... and the People Get Dour
Source: Market Vane Corporation
Similarly, the most recent
Commodity Futures Trading Commission
commitment-of-traders report shows large speculators net short 57,180 long Treasury bond contracts, according to
. Last fall, they were net long as much as 105,365 contracts.
Yet all this negativity does not really mean the Treasuries have reached their nadir, thinks
bond strategist Tony Crescenzi. Speculators are only a small part of the market, he notes, and though sentiment surveys may suggest an exceedingly bearish attitude toward bonds, "people aren't putting their money where their mouths are."
Duration surveys, which compare portfolio managers' bond positions to their benchmark indices, are currently sitting about 100% -- or dead neutral. A higher number suggests that managers are buying bonds with longer maturities and are confident of a benign inflation outlook -- last fall, the
Stone & McCarthy
duration survey reached as high as 107.1%. A lower number suggests managers are migrating toward shorter-term issues.
"You haven't seen capitulation in terms of duration," says Crescenzi. "In the past, when the market has sold off, we've seen that go down to 96% or 95%."
Moreover, negative sentiment in itself does not necessarily mean the bonds have reached their low.
"An oversold market can get more oversold," says Bill Sullivan, chief money-market economist at
Morgan Stanley Dean Witter
. "These measures, as useful as they are, don't necessarily pinpoint the turning point in bond market prices." Still, Sullivan thinks that the Treasuries may be approaching bottom -- but not before some more capitulative selling that could raise the long bond's yield into the 6.40% area.
But Aubrey Lanston's McGlone doesn't think it's worth taking chances at these levels. If the market doesn't see some real smoking-gun numbers on inflation (and today's in-line
Consumer Price Index
was decidedly nonsmoking), he thinks bonds are going to see a snapback rally that nobody would want to be caught on the wrong side of.
"I can buy or do nothing," McGlone says. "There's no way I can recommend a short position. Then you get a situation like in gold, and we know what happened there."