Rising Bond Prices A Negative Economic Signal

From Bloomberg:

Treasury 10-Year Notes Rise as Jobs Data Add to Concern Recovery Faltering

By Susanne Walker and Cordell Eddings - Jul 2, 2010

Treasury 10-year notes rose after a government report showed U.S. employers eliminated jobs in June, adding to concern the economy is falling back into recession.

The yield on the two-year note was within five basis points of its all-time low. The extra yield investors demand to hold 10-year notes over the shorter maturity fell for a fifth day on heightened deflation concern.

This is a very weak recovery given how severe the recession was,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo & Co. in Milwaukee. “People are still sorting through the details.”

The yield on the 10-year note dropped two basis points, or 0.02 percentage point, to 2.93 percent at 8:49 a.m. in New York, according to BGCantor Market Data. The price of the 3.5 percent security maturing in May 2020 rose 5/32, or $1.56 per $1,000 face amount, to 104 27/32.

U.S. employers cut 125,000 jobs in June after an increase of 433,000 in the previous month, the Labor Department reported. The median forecast of 82 economists in a Bloomberg News survey was for a reduction of 130,000 jobs. The unemployment rate dropped to 9.5 percent from 9.7 percent.

“The possibilities of a double dip are in the minds of a lot of people in the market,” Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut, said before the report.

Futures on the CME Group Inc. exchange showed a 17 percent chance of the Federal Reserve raising its target lending rate for overnight lending between banks by at least a quarter- percentage point by the December meeting, compared with 36 percent odds a month ago.

Yield Curve

The yield curve flattened yesterday to the narrowest since October after the Labor Department reported that initial jobless claims unexpectedly climbed to 472,000 in the week ended June 26 from a revised 459,000 in the previous week. The median forecast of 46 economists in a Bloomberg News survey was for a decrease to 455,000 from a previously reported 457,000.

The narrowing spread indicates investor preference for longer-term bonds, which tend to rise on slowing inflation. Two- year rates tend to track the outlook for the Fed’s target rate for overnight lending.


The bond market is now showing strong signs that the "recovery" is based more on blind faith and less on fundamentals. Typically, after a severe recession, even in a developed country like the United States or Canada, GDP grows at 6 or 7% on an annualized basis for several quarters.
So far this has not happened in developed countries (except for the first quarter in Canada (6.1%) followed by a slow down the next quarter (3.8%). It would seem that much of the recovery commentary is wild eyed optimism combined with smoke and mirrors. In the view of this blogger, the high levels of leverage in western economies, including extreme levels of sovereign debt, are acting as a ballast, pulling against any real progress.
To date, rather than letting the economy deflate and purging the excess credit from the system, governments have been determined to try to re-flate through stimulus packages and bailouts. So far, this has shown little lasting success.

I suspect, we are now past the zero hour. The debt is too high to be sustained. My target date of severe stock market collapse by the end of March 2011 is still in place (I will post reasons for this later).

It is my anticipation, that the velocity of money will continue to fall as consumers become more frugal, and that this will reinforce the deflationary spiral.

The biggest threat to a true recovery, in my view, is massive government intervention in the money supply, rather than allowing the necessary deflationary correction to occur. We will need to be on the lookout for all kinds of tricks, such as a new fiat currency system down the road. One proposed recently was based on SDR's from the IMF. The other signal to watch for is a bond market collapse, which will likely come after a severe stock market downturn.

In my view, the only way to restore confidence, is the return to money that is not based on debt - that is to a gold standard.