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MONEY WATCH.Navigation: Main page Author: Lim, Paul J. Section: Money & Business
Hey, Is the Maestro Running Short of Magic? Call it the revenge of the bond market. In February, Federal Reserve Board Chairman Alan Greenspan questioned why bond traders were driving down long-term interest rates just as the Fed was hiking short-term rates. He called this a "conundrum," since the economy was growing fast enough that inflation was a concern. But the bond market may have had good reason to push rates lower, with recent data showing the economy slowing, including a disappointing first-quarter report on gross domestic product. Last Tuesday, when the Fed raised short-term rates for the eighth straight time, bond traders defied Greenspan again by pushing down long-term rates, effectively putting him in a box. The spread between short and long rates has narrowed significantly now that 10-year treasury yields have fallen, from 4.62 in June to 4.24 percent. If Greenspan raises rates much more, he could invert the yield curve, where short rates are higher than long ones. "Would the Fed risk inverting the yield curve, knowing that, historically, this is a leading indicator of recession?" asks Nick Sargen, chief investment officer for Fort Washington Investment Advisors. The bond market, in other words, could force Greenspan to stop raising rates quite a bit sooner than he planned. Better News on the Job Front--But Only for AmericansSome U.S. companies, it seems, have found something new to outsource: layoffs. Last week, IBM divulged plans to cut up to 13,000 jobs--but in a twist, most of the layoffs will occur in Europe, not America. It's part of a longer-term trend that has gone largely unnoticed, says Joseph Quinlan, chief market strategist for Bank of America's Investment Strategies Group. "In fact, some of the deepest cuts in manufacturing employment among U.S. firms have taken place abroad--in places like the U.K., Brazil, South Korea, and Japan." This could be a real shot in the arm for the domestic labor market and may help explain why layoffs here are slowing down. Last week, the government said a surprising 274,000 new jobs were created in April. According to the outplacement firm Challenger, Gray & Christmas, planned job cuts announced in April fell to 57,861, the lowest tally since November 2000. Even better news: Job cuts tend to slow down in the summer months. The Return of the Long BondNearly four years after it stopped issuing the beloved long bond, Uncle Sam is weighing whether to bring back 30-year treasury securities. This would be good news for pension funds, which would welcome the higher yields of 30-year bonds. But the move could lead to higher mortgage rates because mortgages track 10-year treasuries. If the reissuance of the 30-year cuts demand for the 10-year, warns Mark Zandi, chief economist for Economy.com, it could drive up yields--and mortgage rates. PHOTO (COLOR) PHOTO (COLOR) ~~~~~~~~ By Paul J. Lim in the Fair Use guidelines of the 1976 U.S. Copyright Act. info [at] singlearticles.com Powered by CommonSense |
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