Many might be wondering why it is that Treasuries are trading well today. The answer really should be: why are equities trading so poorly. I do not see anything unusual in the way Treasuries are acting, but here goes.
Here are a few reasons for the Treasury market's strength:
1) The equity market has retraced over 50% of its recent gains from the low of 10,828 on July 15th to the high of 11,698 on July 23rd. Weakness in financial shares highlight today's setback.
2) Economic data in Europe was again weak, with Germany's GfK AG's consumer confidence index slipping to a 5-year low (based on 2,000 responses). This helped rally European government bonds, boosting Treasuries.
3) Certain mortgage-backed securities saw buying earlier in the session, perhaps because a swath of portfolio managers including Bill Gross at Pimco have recently said the securities hold value. The buying lends a bid to Treasuries in a number of ways including the reduction of dealer inventories and by improving the relative value of Treasuries (miniscule so far given the arguably overvalued level of Treasuries).
4) The Federal Reserve Bank of Dallas reported today that its manufacturing index for the month of July fell to -27.4 from -24.1.
5) There is a story on ABCNews.com that stirred a bit of chatter regarding the Department of Homeland Security. Read it and draw your own conclusions.
6) The International Monetary Fund delivered its Financial Stability Report today, saying the following: "Global financial markets continue to be fragile and indicators of systemic risk remain elevated. Credit quality across many loan classes has begun to deteriorate with declining house prices and slowing economic growth. Although banks have succeeded in raising additional capital, balance sheets are under renewed stress and bank equity prices have fallen sharply. This has made raising additional capital more difficult and increased the likelihood of a negative interaction between banking system adjustment and the real economy. At the same time, policy trade-offs between inflation, growth, and financial stability are becoming increasingly difficult. The resilience of emerging markets to the global turmoil is being tested as external financing conditions tighten and policymakers face rising inflation."
7) There had been concern recently that the Treasury Department might introduce in its Wednesday quarterly refunding announcement new securities into its current mix of offerings in order to fund the growing budget deficit. Unfounded chatter over the possibility of either a 7-year or a 15-year maturity weighed upon Treasuries. The 7-year note is one that in past years was loathed. Market concerns regarding these possibilities have subsided, in part because many analysts have been dismissing the idea.
8) Inflation expectations and expectations over the odds of near-term Fed rate hikes have subsided. For example, 10-year inflation-indexed Treasuries are priced for a 2.34% consumer price index, down from a peak of 2.60% on July 4th. As for the Fed, the market is priced for the funds rate to end 2008 at 2.255%, down 5 basis points on the day and well below the peak of 2.86% set on June 12th.
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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the co-author of the just-revised "The Money Market" and "The Strategic Bond Investor."