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Bond Market Analysis: 10-Year Treasury on the Rise

August 22, 2012

Treasury yields rose on the week especially on the longer end of the yield curve. Indeed, yields on the 10-Year Treasury rose to their highest levels since May of this year. Is it time to panic? Not quite. 

-David W James, senior vice president, James Investment Research



Treasury yields rose on the week especially on the longer end of the yield curve. Indeed, yields on the 10-Year Treasury rose to their highest levels since May of this year. Is it time to panic? Not quite.

Actions, as measured by volume, matter. Data provided by ICAP suggests last week's bond market movement was on lighter-than-normal volume suggesting the sell-off may be more of a head fake than a movement of conviction.

Additionally there continues to be problems for the economy which are usually associated with solid returns for bond holders. Our research department has noted the importance of the regional FED reports; especially those from Chicago, Philadelphia, New York, and Richmond. Negative readings on these reports are similar to the presence of a horseman of the economic apocalypse. Historically when all four are negative, like they are now, there has been a 60% occurrence of economic contraction.

Similarly new orders, according to the Institute of Supply Management, are falling as are capital goods orders. Some may be comforted by the robust retail sales number which gained 0.8%. However this gain is an illusionary headline brought about by the powerful magic of seasonal adjustment. Without the seasonal adjustment, sales did not rise, but fell 0.9%. Paraphrasing Mark Twain there is considerable truth when he proclaimed, "There are lies, darn lies, and then there is statistics." Just so.

What is the biggest threat in the intermediate term for bonds? Faith by Wall Street economists. Their track record has been poor for an extended time. Each quarter Bloomberg News surveys numerous economists on their projections for the yield on the 10 Year Treasury. Even with today's extraordinary low yield levels the economists still typically miss reality by over 50 basis points (0.50%). Not only that, but the economists usually get even the direction of rates wrong. If we do see a change in consensus opinion towards bullishness it will likely be a time to take profits.

Presently our indicators remain favorable. The backup in yields may prove to be an excellent opportunity to extend durations for appropriate accounts.