The Market's Bad MedicineApril 06, 2010 Posted by: Joe Morgan, CFA
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...Read More