Waking up to price pressure
The bond market was shrugging off inflation fears. Not anymore
Ironically, economists and market watchers view what has taken place in recent weeks as a good thing. "I think this is totally healthy for the markets," says Robert MacIntosh, chief economist for Eaton Vance. "It might be painful for those owning bonds, but I'm glad that bond yields are getting to where they ought to be." Indeed, if long-term bond yields continued to fall while the Fed jacked up short-term rates, it might have led to what's known as an inverted yield curve, in which long-term bonds pay out less than short-term securities. Historically, inverted yield curves have been ominous predictors of recession. Few are talking about an economic slowdown but rather a period of modest growth in the 3 to 3.5 percent range. In fact, forecasters generally expect the U.S. economy to expand 3.6 percent this year and 10-year treasury yields to rise modestly to 5 or 5.25 percent by year's end.
But one thing could cloud that view: the next jobs report, due out on April 1. A greater-than-expected jump in job creation in March or a surprising uptick in wages could lead to more fears of inflation and set off another sell-off in bonds. And that, in turn, might drive yields even higher.
Of course, the market has a tendency to overreact to good news as well as to bad news. And if yields should jump higher and faster than expected, that could lead to an altogether different type of conundrum: one in which the bond, stock, and real-estate markets all take a hit simultaneously.
HEADING HIGHER?
Yield on 10-year treasury notes
[Chart data are incomplete]
3/1/04 3.99 pct.
3/17/05 4.47 pct.
*As of March 17, 2005
Source: Yahoo! Finance
Graphic by Rob Cady-- USN&WR
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