Macro Monitor

We raised most of our twelve month yield targets this month, based on higher inflation expectations and U.S. debt concerns. Extremely low yields at the short end of the curve are the result of a stimulative Fed policy. Rising yields at the long end of the curve reflect rising inflation expectations.

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Stocks win the bonds versus stocks comparison.

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The bond bubble could be deflating, as investors demand higher yields to compensate for expected rising inflation and the U.S. mountain of debt.

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Bond bubble continues to inflate, much like money pouring into tech stocks at the height of the internet bubble.

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The kneejerk reaction to worries about excessive sovereign debt has been to bail out of the European sovereign debt and pile into U.S. sovereign debt. Unless the U.S. can get its own fiscal act together, we may face this same panic reaction farther down the road.

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Bond bubble continues to inflate, much like money pouring into tech stocks at the height of the internet bubble.

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The kneejerk reaction to worries about excessive sovereign debt has been to bail out of the European sovereign debt and pile into U.S. sovereign debt.

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A mountain of new debt, a balloon of short term borrowing due near term, and the likelihood of higher interest rates are big hurdles.

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A mountain of new debt, a balloon of short term borrowing due near term, and the likelihood of higher interest rates are big hurdles. Moody’s says U.S. debt could test its AAA rating.

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A mountain of new debt, a balloon of short term borrowing due near term, and the likelihood of higher interest rates are big hurdles. Moody’s says U.S. debt could test its AAA rating.

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A mountain of new debt, a balloon of short term borrowing due near term, and the likelihood of higher interest rates are big hurdles. Moody’s says U.S. debt could test its AAA rating.

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We continue to have longer term concerns about U.S. debt and deficit. The mountain of debt is building and interest expense rising.

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Jim Floyd’s analysis of the interest costs facing the U.S. due to the soaring budget deficits.

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The longer term data does suggest that at current interest rate levels, investors can expect sub-par returns over the next 1, 3, and five year timeframes— and we use the term “sub-par” quite literally.

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Get out in front of the lemmings. We expect to ultimately see bond funds reverse now that performance has been lagging the stock market. But where will the money go? Our best guess is that it flows to Emerging Country Equities….once again chasing strong performance.

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High Yield bonds are still rated Attractive, but the spreads have narrowed significantly.

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During the past several years, it has become fashionable to believe that bond investors are more sophisticated than stock investors. Personally we don’t buy that bond investors have any edge in intelligence or diligence.

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Jim Floyd is boosting his 12 month interest rate targets by about 50 basis points across the board. The economy is expected to be showing signs of recovery by year end 2009, and the credit markets are thawing.

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Credit spreads have blown out to levels not seen since the 1930’s. What are the implications for the market?

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There is political pressure to keep inflation low, minimizing COLA (cost of living adjustments) and Social Security costs. Low inflation also helps to keep interest rates down, which keeps government interest payments as low as possible.

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