English Lessons

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With the ongoing Greek debt drama dampening market activity and poor business forecasts from the Philadelphia and New York Federal Reserve banks this week, investors have begun to march into Treasuries once again. Yields on U.S. 10-year Treasury notes fell to their lowest levels of 2011 Thursday, sticking below 3% in a signal that risk aversion is the order of the day.
The 10-year yield was down to 2.91%, falling below its 2.96% level at the end of last week when a selloff in equities sent cash into the bond market.

To bond market pros, the still-robust appetite for U.S. debt is either foolish (Bill Gross may be on CNBC at this very moment saying that U.S. debt is less safe than Greek debt or somesuch) or too persistent to run from. The debate is largely driven by the weak economic signals that the U.S. continues to show with its unemployment rate and reports on manufacturing, and by the circus-like arguments over fiscal policy that are taking place in Washington now.

The U.S. government’s debate over the need to raise the current debt ceiling was capped this week by U.S. Fed chairman Ben Bernanke’s statements to leaders in Congress leaders that “maintaining the status quo is not an option” for the federal budget. (See “Apocalyptic Bernanke”)

With so many challenges facing the U.S., it certainly is a challenge to explain why Uncle Sam’s IOUs are still viewed as such a comforting safe haven by so many investors. One argument from experts like Gross who are finding much better opportunities in foreign bonds, is that there simply hasn’t been a paradigm shift yet, one that points investors in another direction than the U.S. when safety from default or monetary policy is the issue.
Another argument is that other typical safe havens where investors could put their money have not held up. Even in the face of a Greek debt implosion the U.S. dollar is just gaining modest strength against the euro. Another major factor is the tremendous amount of value that has been drained out of the housing market in the wake of the bubble.
“Although it has been 5 years since the housing market peaked, a bottom in home prices still remains elusive,” writes Demitri Delis for BMO Capital Markets this week. “With a string of economic data printing on the weak side over the past month, we believe the odds for a double dip recession have now increased significantly.”
Delis’ bearish outlook is gaining popularity on the Street. He writes, “The housing market will remain vulnerable for the foreseeable future and any renewed weakness will have a negative effect on the economy as bank balance sheets will face more losses and consumers will pullback on spending.”
The most recent indication that investors may have reason to seek safe haven emerged in the manufacturing data reports this week. “The sharp drop in the forward-looking survey contradicts the Fed’s contention that the soft patch will resolve itself in the Fall after the supply chain is corrected,” said Steve Blitz, senior economist for ITG.
Manufacturers that reported lower projections for hiring and for capital spending over the next six months have provided a picture of the economy that may only come to light after QE2 ends this month, Blitz said, and markets are left to stand on their own feet again.

The 10-year yield was down to 2.91%, falling below its 2.96% level at the end of last week when a selloff in equities sent cash into the bond market?
A. TRUE
B. FALSE

Manufacturers that reported lower projections for hiring and for capital spending over the next six months have provided a picture of the economy that may only come to light after QE2 ends this month?
A. TRUE
B. FALSE