Bonds

Welcome Scott Archer.... More Bank Troubles and Write-Offs.... U.S. Banks Played Key Role in Oil Bath, Real Estate Debacle, Third World Loans and Busted LBO’s.... America As The “Center” Of the World Economic Universe.... Australia/New Zealand Update

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In August, the dollar was strong and inflation fears continued to wane. So why were most long-term bonds down 2-4 points? We can blame the economy, or at least Wall Street’s perception of the economy.

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The bond market marked time for the first three weeks of July, but came on strong in the last five trading days. July gains in bonds did not keep pace with stocks, but most bonds were up a point or so for the month.

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In June, the bond market appeared to be unstoppable. After a pause mid-month, prices came roaring back edging into new high ground at month end.

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For quite some time this publication has had a pretty good feel for the bond market. But May surprised me. My expectation was a stronger market early in the May followed by a correction.

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Aussie bonds appear to be a very attractive investment. But what effect will a falling (or rising) Australian dollar in a variety of interest rate environments have on U.S. investors who buy Australian bonds?

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Aussie Bonds Attractive Once Again...MTA Seminar...Copper Update...The Age Wave Consumer...Bullish? Gold Charts

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With at least some preliminary signs the economy is slowing, accompanied by more comforting PPI and CPI numbers, it would appear the Fed is relaxing a bit.

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In mid-March, the bond market was jolted by a nasty PPI number and spent the rest of the month creeping back to pre-PPI release levels. The net result was an unchanged to slightly higher bond market in March.

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In February, stocks and bonds tracked the same course. The CRB Index came down significantly in February and was close to breaking down before a late month surge. The JOC Index remains above its January breakout level.

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This is indeed a strange environment, where higher short-term rates in effect have become a bond market positive. High short rates cool the economy and keep the dollar strong. Both of these consequences are bond market positives.

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Forget about the economy, forget about the uptick in the CPI, and forget about the bulge in bond supply. U.S. interest rates rose in November because the dollar went down.

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Comparing cash flow yields with bond yields we find that stocks are not significantly overvalued compared to bonds. Stocks are not yet comparatively cheap, but they come out much better in this stock/bond comparison than in the dividend yield/bond yield comparisons or in the earnings yield/bond yield comparisons.

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Wall Street's financial mechanics created chaos in the high grade corporate bond market last month. With exceptions, the LBO frenzy has destroyed, at least for the time being, the usefulness of bond quality ratings. The damage done to many bond portfolios was massive.

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We thought last month might be the end of this bond/stock comparative series. However, a recent note from a client has prompted us to undertake an additional study comparing common stock cash flow yields with bond yields.

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The Gods of the bond market were kind in September, with the bond market performing exactly as we thought it would.

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For the month, the net loss for long T-bonds amounted to a half a point or less. All things considered, I thought it was an impressive performance, even though it took place in the dog days of August.

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T-bonds went into a seven trading day swoon in early July. Then for the rest of the month they backed and filled. Outside the Treasury market, damage was considerably less in July.

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A month ago, institutional bond buyers were skittish, nibbling a little, but mostly sitting on their hands waiting for lower prices. As it turned out, the bond market didn’t need rain, nor did it need easier money and lower short-term rates.

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The first week of April brought a lethargic rally in T-bonds, but prices faded fast around mid-month, stabilized for a week and then sold off again at month end.

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