Macro Monitor

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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Today, led by soybeans and other grains, the U.S. is getting a dose of Isolated Factor Inflation. The Fed can’t do anything to alleviate this, but Mother Nature can. Good hard rains in the farm belt could take the sizzle out of this brand of inflation.

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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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Have we entered an age of interest rate discontinuity, where past interest rate history has no meaning? Are the current high rates merely a long-lasting hangover from the high inflation of the late 1970’s and early 1980’s? Is it a matter of there being too much of a demand for dollars and not enough supply? NO!

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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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T-bonds slide 4-5 points in March, with corporates holding up better. Bonds look good, but T-bonds are expected to suffer from renewed inflation fears, dollar weakness, deficit concerns and maybe big foreign selling.

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Outside of the 10% move in 30-year zeros (premium widened), the bond market in February was a quiet affair. In terms of the bond market, it was a good month to be on vacation. I didn't miss much.

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The new year started with a brief sinking spell for the bond market.

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After an early December sinking spell, the bond market kind of floated higher for the rest of the month, closing out 1987 just slightly below its fourth quarter highs.

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Much has been made about the CRB Index making a new high on November 27. We are very skeptical. Comparisons herein will demonstrate the warping in this index. I think we are now getting an inflation false alarm, but at this point the signals are mixed.

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After an ominous five-point sell off in the first part of October, the Treasury market turned on a dime and blasted upward, running up 10 points in four days. But not all bond market sectors participated. It was a flight to quality.

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The bond market held its own in the middle two weeks of September, but the first week and the last week of the month were downright nasty.

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The bond market edged tentatively higher in the first half of August, but lost it all in the last two weeks of the month. T-bonds made new lows for the year in the last days of August.

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The bond market held Its own for the first few weeks of July, but prices took a sharp dive on July 21 and drifted lower for the remainder of the month.

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The bond market entered June with a sharp one day sell off and then spent the best part of the month edging higher. However, in the last week or so, bond prices drifted lower in a relatively dull market.

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For the time being, negative pressures seem to have subsided for the bond market. We don’t think the decline in bond prices is over, but June should allow for a little rest and rehabilitation on the part of the players.

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April couldn’t have been much crueler. Even with the rally from near panic lows, long T-bonds lost 6-7 points for the month, as did long municipals. Corporates held up a little better, dropping only three or four points.

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As we enter April, our view of the bond market is increasingly cautious. Very short-term, a snap back is expected after the rocky action in recent sessions, but then what? This issue we are pulling in our horns, reducing long bond exposure.

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The bond market surprised a lot of the players in February. When the T-bond futures broke 98 around mid-month, a number of traders thought it was the beginning of a significant decline. But, as you may recall from last month, this publication did not feel such a breakdown would be significant.

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