July 12, 2021 BARRON’S 5
UP & DOWN WALL STREET
On Thursday, the 10-year yield skirted 1.25%,
its lowest level since February. This raises a
question:What’s wrong with this picture?
Bonds’ Odd Behavior
May Presage Weaker
2nd-Half Economy
ers. At the same time, the major stock
market indexes were hitting or hover-
ing near records.
Yet the bond market didn’t seem to
get the message. A month ago, this
column argued that the market in-
stead seemed to be looking ahead.
Yields rose sharply early in the year,
before the current robust economic
gains. But the bond market now is
adjusting to the prospect of more
moderate growth in the second half,
with reduced fiscal largess and no
$1,400 or $600 stimulus checks. And
it’s looking ahead to the eventual pros-
pect of the Federal Reserve throttling
back its securities purchases, which
currently pump $120 billion a month
into the financial system.
And as yields slumped and bonds
rallied, stocks backed off around mid-
week out of concern of the message of
the debt market. But after the key 10-
year note bounced off the 1.25% psy-
chological support level early on Thurs-
day, which also coincided with the 200-
day moving average for the benchmark
yield, stocks pulled out of their funk.
By the end of the holiday-shortened
week, the Dow Jones Industrial Aver-
age, the S&P 500 index, and the Nas-
daq Composite stood at records, with
gains averaging about 1%, while the
10-year note’s yield wound up at 1.35%.
Looking ahead to the coming week,
investors returning from an extended
Independence Day break will confront
a slew of key economic data, important
congressional testimony by Federal
Reserve Chairman Jerome Powell, and
the beginning of the second-quarter
earnings-reporting season.
The numbers on the economy will
suggest that the booming second quar-
ter ended with a stagflationary whim-
per. On the inflation front, consumer
prices are forecast to have risen 0.5%
in June, versus 0.6% in May, and to
have come in 5% above the level a year
earlier, just as the preceding month
did. Retail sales are estimated to have
fallen 0.6% in June, on top of May’s
1.3% drop, largely a result of lower
auto sales. The latter might reflect
tight supplies of some models, owing
to semiconductor chip shortages.
However, there are signs that the
used-car market is coming off the boil.
Nomura economists note a 1.3% drop
in the Mannheim Index of used cars
last month.
Powell is likely to be quizzed (by
the House Financial Service Commit-
tee on Wednesday and the Senate
banking panel on Thursday) on how
the Fed sees the economy progressing,
especially on employment. His pre-
pared testimony, released on Friday,
addresses the gap between job
openings—a record 9.21 million in
May, according to the latest Jolts
(Job Openings and Labor Turnover
Survey)—and unemployment, which
ticked up to 5.9% in June. There’s little
that monetary policy can do about
that mismatch, other than to continue
to let the economy run hot, risking
further inflationary pressures and
market distortions.
Market participants hope that Pow-
ell’s inquisitors ask him about the
impact that the Fed’s ongoing securi-
ties purchases are having on bonds,
stocks, and housing.
On the last score, even some Fed
officials have started talking about
when to reduce the $40 billion of
agency mortgage-backed securities
that the central bank buys every
month in the midst of a housing
boom. Most Fed watchers don’t see
lower purchases of mortgage or Trea-
sury securities until next year. Pow-
ell’s prepared statement reiterates
that, before the Fed does trim its buy-
ing, it will give ample notice to avoid
upsetting the markets.
The Fed isn’t the only central bank
to watch. The Peoples Bank of China
eased its monetary policy on Friday.
After Asian markets had closed, it an-
nounced a larger-than-expected 0.5%
reduction in banks’ required reserve
ratios, effectively freeing up one trillion
yuan ($154 billion) of liquidity.
Bank of America’s strategy team,
led by Michael Hartnett, notes that
spreads on Chinese high-yield bonds
have gapped up sharply (by three
percentage points, to a yawning 11
percentage points, a sign of credit
stresses) in the past six weeks. That
hasbeenaccompaniedbyaslumpin
By Randall W.
Forsyth
T
he bond market
typically operates
in the background
in peoples’ minds,
with most taking
notice only when
yields lurch in one
direction or another. More recently,
yields have mainly zagged lower when
the consensus call was for them to zig
higher. That has been enough to grab
investors’ attention.
Recall that the 10-year Treasury
note yield was thought certain to be
headed to 2% this year, more than
double where it ended 2020, amid the
economy’s continued reopening, per-
mitted by the introduction of the vac-
cines against Covid-19 and the thrust
provided by unprecedentedly large
monetary and fiscal stimulus.
But after nearing the 1.75% mark at
the end of the first quarter, the key
benchmark yield has largely con-
founded those expectations by revers-
ing course and moving lower. On
Thursday, the 10-year yield skirted
1.25%, its lowest level since February.
Even outside the bounds of the bond
market, this raises a question: What’s
wrong with this picture?
After all, the economy has been
booming, accompanied by rising
inflation—exactly the opposite of what
would be conducive to lower yields
and higher prices. Consensus esti-
mates among economists had the U.S.
gross domestic product zooming
ahead at a 9.6% annual clip. The pre-
dictions have been accompanied by a
parade of anecdotes about bubbles in
house prices and tight supplies of
Jeffrey Isaac Greenberg/Alamyused automobiles, as well as of work-
A shopper in a
Trader Joe’s market
during the height
of the pandemic,
when the current
economic boom
was unexpectedly
building in the U.S.