Bond market
Interview: John Poole---Mellon Private Asset Management---Fixed Income Manager
orders for durable goods dropped in november led by the largest decline in computers and electronic products in nearly 3 1/2 years. orders fell by 3.1%. factoring out transportation equipment, x-transportation, as the pros say, they fell by an even larger 3.7%. most economists surveyed by bloomberg predicted that the durable goods orders would rise, not fall. but there was encouraging news from the unemployment offices as the number of people filing for first-time jobless claims fell slightly to 353,000 last week, tying the level that we saw in late october which was the lowest since january of 2001. this is now the 12th week that the number of first-time filers stayed below the key 400,000 level, which suggests that the unemployment outlook is improving as we head into 2004. and also, november sales of new homes unexpectedly fell, dropping to an annualized rate of 1.082 million units. economists expected sales to pick up. according to the median estimate in a bloomberg survey, last month’s reading is the lowest since may but november was the sixth best month ever as mortgage rates remained near historic lows. our next guest says january may hold the key as to what to expect from the fed and the bond market for all of 2004. john poole helps manage $12 billion in bonds at mellon private asset management and joins us from our boston bureau with more. john, january, is this the january effect, so to speak, for the bond market? it does look that way.
if you look at the trading range we’ve been in, it’s narrowing. you mentioned reasons why it was doing better today in the treasury market. we’ll have other reasons why it may be doing a little worse. but if you step through and look at the volatility in the market and you can add the stock market to that, you’ll find the volatility continues to narrow. that narrowing process suggests that we’re heading towards some kind of breakout in january whereby we probably get a pollyanna year.
we’re looking at the yield on the 10-year note, certainly has come up from the lows we saw earlier in the year, 3.3% in may. but if you look at the big picture, i put together a 40-year chart of 10-year yields and the reality is that you say bond yields would be comfortable and normal back around 6% again? how quickly will we see that level?
it could well be 6% or higher by the end of next year or it could well be 3% or below. there are two very strong cases you could make for either of those scenarios. the standard forecast of 5.25% by year end, the gradually rising rates, the fed doing something in june, that forecast to me doesn’t stand a chance against the huge array of unusual and different sort of backgrounds. we’ve never had the fiscal or monetary stimulus. we’ve never had the series of economic conditions we have now going into this year so taking, you know, well, we’ll head back to normal, that doesn’t work in this environment. it’s going to be one or the other. in january, i think investors should have the liquidity ready to start thinking either much higher rates by year end or much lower rates.
so you win if the economy loses. today’s a great example with bad news on durable goods and a surprise number, weaker than expected, on housing starts and bonds rally. and earlier in the month we had a surprise in inflation. so a lot of december surprises. do you think that surprise environment with economic data will continue next year?
oh, yes, absolutely. my favorite is the jobs report that came out for the month of november. up 57,000 and political sponsorship is saying we’ve lost many jobs and yet you dig through the numbers, falling unemployment and for the small and mid sized companies, we had a huge increase in jobs so you have two very disparate numbers that are key to the economy and it will continue to be like that.
what did you think of that two-year auction earlier this week with demand rising for the short-term two-year notes, almost double the demand versus the supply actually offered. what is that telling you?
well, that’s a little different from what i’d seen. the auction seemed to get hung up a little bit. it was mostly a rollover of existing issues, unlike what we had early in november with all new money coming into the market. it is getting more difficult to get these auctions to move off and you see a lot of discussion, will japan support the currency, come in and buy treasuries? china, will it continue to buy our treasuries or look at a basket. as we get into next year, we’ll continue to talk about the deficit and about how these auctions will be funded.
i’m sorry, john, we’re running out of time. thank you very much, folks. that’s john poole from mellon private asset management, a bond manager. up next, parmalat files for bankruptcy and it’s getting down to the wire for a lot of gift givers out there. will retailers profit from all the last-minute shoppers?
