I ain't got a fever, got a permanent disease
It'll take more than a doctor to prescribe a remedy
I got lots of money but it isn't what I need
Gonna take more than a shot to get this poison out of me.
Bad medicine is what I need!
- Bon Jovi
The bond market seems to be screaming in favor of "bad medicine" in the form of higher interest rates.
Over the last two weeks, the 10-year yields have risen close to 30 basis points. The latest burst came after Friday's employment figure release showed an additional 162,000 workers added to payrolls last month.
You can slice the data to show the growth is not all that impressive (weather and census workers are the prime culprits, they say), but the bond market cheered (or jeered depending on what side of the trade you are on) just the same.
Even shorter yields that are tied more closely to Fed funds have been on the rise. Two-year Treasuries are up about 14 basis points over the same period. This is a large move if one believes the "extended period" rhetoric coming out of the Fed, but recall the language of the Fed can be quite deceptive.
As regular readers of this column know, I am a bit more cautious in my outlook for higher rates. Surely they are coming, but not likely until 2011.
There remains a great amount of slack in the economy, especially in the form of employment. Not only do we have around 15.5 million people looking for work, but many of those that have jobs are working less than the typical workweek.
But even the abysmal employment situation is not the strongest argument for keeping rates at their current nadir.
Inflation is really the key.
Today, there are pockets of inflation here and there, but overall demand remains insufficient to prod widespread price increases across the entire globe.
I strongly believe that it is imperative for the Fed to retain its inflation-fighting title by keeping price movements in check. However, today, there simply is no real sign of such movements and with the employment situation as dire as it is, it's important to keep rates low in order to encourage transaction activity.
Our clients of SVB Asset Management (as well as our employees!) are tired of such low rates in the marketplace, but that is entirely the point. By keeping rates low, the Fed is attempting to encourage those with cash to spend it, thereby increasing demand and driving the economy (and jobs!) forward.
In our space, "spending cash" typically translates to M&A activity, which, of course, is geared to creating greater efficiencies. This means potentially more lay-offs and less spending. It's counterintuitive; however, in the long run, wringing efficiencies out of the economy is also truly additive.
In any case, the next time you feel the need to grumble about today's low interest rates, realize they are only a tool the Fed is using to get those with cash to spend and/or invest for the future.
Now, if we can get the rest of Washington to focus on the problems facing the economy, perhaps forward-looking uncertainty around regulation, taxes and government activities will begin to clear up and we can start driving the economy forward.
Bad medicine, here we come!
Key Developments
February marked the seventh consecutive monthly gain to personal income, while spending rose for the fifth consecutive month led by consumer services and non-durable goods. However, spending remains some $150 billion below its peak pace and well off the upward trajectory we've enjoyed for the past several years.
Domestic vehicle sales jumped to an 8.9 million annualized pace in March from 7.9 million in February thanks to a great number of incentives. March's pace was the highest level seen since Cash for Clunkers drove sales up to 10.2 million back in August.
March payrolls rose 162,000 after falling 14,000 in February. Only about 48,000 of these jobs were due to census workers; however, much of the gain may be attributed to a bounce after bad weather in February probably drove figures downward.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value.