Watch the bond market, current events
November 12, 2010
– Comments (2) |
RELATED TICKERS: PCK
, NNP
, SPY
Bond and credit markets don't tend to have many unsophisticated retail investors, momentum chasers, or algorithmic traders distorting the market. Bond investors also have to be loss-adverse because there is little opportunity to recover from capital losses. Ignore them at your peril!
Weeks ago I opined that it feels a little like early 2008, but stocks have been steadily going up. As usual, I turn to the bond and credit markets for clues about whether risks are turning into reality. Recently, there have been a couple of rumblings in the bond market. In order of importance:
For one, municipal bond rates are rising. Nuveen's New York bond fund (NNP) is yielding 5.8%. Pimco's California Municipal fund (PCK) is yielding 7.8%. Remember, that is tax-exempt, so that is better than 11% if you pay a 30% tax rate. With the yield on 10yr Treasuries well below 3%, there are only two options. 1)Investors are all wrong and municipal bonds are the single most compelling investment available today, or 2)There will be municipal bankruptices. I'll put my money on the later, but the effect on the economy as a whole will be minimal.
From Bloomberg today, "European Central Bank President Jean-Claude Trichet is the buyer of only resort as the euro area’s bond market melts down." Another from Bloomberg yesterday:
"The best bid for Irish 10-year bonds was 9.07 percent, or a price of 74.09, while the nearest offer was at 8.61 percent, or a price of 76.55" “The wide bid-offer spread indicates how thin trading has become, and reflects a lack of two-way market activity,”
I expect this to have a lot more impact on the economy, just not here in the US. Not that it doesn't affect us, but it is not necessarily a big negative for US markets. It certainly bears watching, though.
Most credit markets still seem healthy, though. I do not see any signs of an impending collapse. I will continue to watch.
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