“You’re doing great – aren’t you having a wonderful time?” One beach goer, seeing another encouraging a somewhat frail-looking older woman to keep swimming far offshore in some of the roughest, pounding surf he’s seen anywhere exclaims, “Hey,what are you doing? It’s dangerous to send her all the way out there!” he says. Comes the reply, “Buddy, you take care of your mother-in-law, I’ll take care of mine.”
Google-news “bond yields” and a media consensus appears to have formed that a new dawn has broken, the low rate era is over and the bond market is coming to terms with a global economy more resilient than thought.

Yet we have been here before as recently as June 2006 when yields on 10 year US bonds touched 5.24%. Exhibit 1 illustrates.

Exhibit 1: SPX vs TNX, 2001 to date


This reads simply like a new chapter in the same story begun in early 2003. The denouement may be underway (there are some inflationary signs in China, and US capacity utilization suggests the same is en route there) but slowly and paced in annual not weekly calibrations. At current levels US 10 year bond rates, real and nominal, are still astoundingly low.

There is no inflation in the US expectations data; globally, capital dictates terms to labour thus signalling more benign price data; money is (still) cheap and abundant; and it is asset owners rather than lenders that are making hay.

Short of a black swan or a shockingly fierce hurricane season the conclusion that bonds are heralding in a new higher rate era is not an inevitable one. But it is clear that bond prices are diverging from equities more profoundly than at any time in the last 27 years (which is merely as far back as the scribe went); and the only comparable period within that stretch is the span from September 1998 to September 2000 in which the current expansion, alarmingly perhaps, has its roots.

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1 comments

  1. Will Rahal // 6/19/2007 10:27:00 PM

    CPI is rising at about 5.5% YTD in 2007. The correlation between CPI and Non-Durable Goods (as percentage of Personal Consumption) is amazing. You can not tell one from the other. I firmly believe that consumption behavior is changing. For the first time in five decades, Wages rose strongly(after the 2001 recession) while consumption of Durable Goods declined in proportion to Personal Consumption.
    see "Consumer gettin' KO'd"
    www.wrahal.blogspot.com

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