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-Caveat Lector- Toronto Globe and Mail, December 28, 2005
http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/
20051228/RCURVE28/TPBusiness/Canadian
"The bond markets sent out a warning signal for the U.S. economy yesterday, after a closely watched market indicator with an uncanny record of forecasting recessions popped up on trading screens ...""'Here is the historical record: We have endured eight Fed tightening cycles in the past three decades. The Fed has inverted the curve on five of those occasions, and after those five Fed-induced inversions, the economy slipped into recession all five times,'" said David Rosenberg, North American economist for Merrill Lynch & Co. Inc"The last time the yield curve inverted was in early 2000, which signalled the bursting of the technology stock bubble."'Inversion' in Bond Rates Hits Stocks
The yield on the 10-year Treasury note has dropped to a level at or below those of shorter-term securities, in what may foreshadow an economic slump.
Blue-chip stocks on Tuesday suffered their steepest decline in two months, as falling long-term Treasury bond yields flashed a classic warning sign of a weaker economy ahead.www.ctrl.org DECLARATION & DISCLAIMER ========== CTRL is a discussion & informational exchange list. Proselytizing propagandic screeds are unwelcomed. Substance—not soap-boxing—please! These are sordid matters and 'conspiracy theory'—with its many half-truths, mis- directions and outright frauds—is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRLgives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credence to Holocaust denial and nazi's need not apply.
Holiday retail sales reports also left some investors unimpressed.
The Dow Jones industrial average gave up a 50-point rally early in the day to end down 105.50 points, or 1%, at 10,777.77. It was the Dow's worst one-day slump since Oct. 27 and pushed the widely watched index back into the red for the year.
Broader gauges also were down sharply, dashing hopes for the traditional "Santa Claus rally" in the final week of the year.
What worried some investors and traders Tuesday was a relatively rare occurrence in the bond market: The yield, or interest rate, on the bellwether 10-year Treasury note declined to a level that equaled or was slightly below yields on shorter-term Treasury securities.
Normally, longer-term bonds pay more than shorter-term issues to compensate investors for the risk of tying up their money for an extended period.
When long- and short-term interest rates converge, it [almost always] is a sign that the economy will slow — so they're locking in long-term yields in anticipation that rates overall soon will level off or even head lower.
"We should be worried" about the economy, said Michael Cheah, who manages $2 billion in bond assets at AIG SunAmerica Asset Management in Jersey City, N.J.
The 10-year T-note yield, a benchmark for mortgages and other long-term rates, ended at 4.34% on Tuesday, down from 4.37% on Friday and the lowest since Sept. 30.
By comparison, the Treasury sold new six-month bills at an annualized yield of 4.35% on Tuesday. And the two-year T-note ended at 4.34%, down from 4.36% on Friday.
Although the difference between short- and long-term rates has been narrowing for weeks, Tuesday's trading session marked the first time in five years that the 10-year T-note yield ended below the six-month T-bill yield. In Wall Street parlance, that is known as an interest rate inversion.
The last time rates inverted was in the second half of 2000. By spring of 2001, the U.S. economy was in recession.
On Wall Street, that memory was enough to push some investors to sell stocks Tuesday, said Michael Metz, chief investment strategist at money management firm Oppenheimer Holdings in New York.
And because trading was fairly thin in the first session after the Christmas holiday, it didn't take much to move share prices, he said. Some sellers "were throwing in the towel, but there was nobody to throw the towel to," Metz said.
The stock market's concern, of course, is that an economic slowdown could hurt corporate earnings and undermine share prices in 2006.
But many economists and money managers say they don't believe the trend in bond yields is foreshadowing a significant deceleration in the economy.
Indeed, Federal Reserve Chairman Alan Greenspan has said that the central bank did not believe that a convergence of interest rates would be a recession warning, as has usually been the case in recent decades.
This time, other forces may be pulling longer-term rates lower even as the Fed pushes short-term rates higher, analysts say. For example, the record demand this year for U.S. bonds by foreign investors, particularly in booming Asia, has helped to restrain bond yields, many say.
Donald Quigley, a bond fund manager at Julius Baer Investment Management in New York, said he agreed that foreign demand for U.S. bonds was a factor in driving yields lower.
Nonetheless, he said, investors who are willing to accept lower yields on long-term bonds than on short-term securities also must believe that the economy — and inflation — are more likely to weaken than to resurge.
"It certainly doesn't say growth is going to be gangbusters," Quigley said of the rate inversion.
AIG SunAmerica's Cheah said he was more pessimistic about the economy because he worried about the effects of a rate inversion on the housing market. Banks, he said, may no longer find it profitable enough to make long-term loans such as conventional mortgages.
"I'm betting that … many banks will stop lending to the housing market," triggering broader economic weakness, he said.
Mixed reports Tuesday on holiday sales, both before Christmas and for the post-Christmas shopping rush Monday, also raised concerns about the economy, analysts said. Michael Niemira, economist at the International Council of Shopping Centers, told Bloomberg News that retailers had a "C-plus" holiday season.Let us please be civil and as always, Caveat Lector. ======================================================================== Archives Available at:
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