Bond market (slow)
Interview: Miller Tabak & Co.---Crescenzi, Tony---Fixed Income Strategist
>> the price of crude oil in new york fell on speculation the world economy will not grow fast enough to keep inventories from increasing. it closed at $341.07 a barrel. gold futures rose more than a percent to close at $363.20 an ounce. there is speculation an interest rate cut next week by the fed would weaken the dollar making the metal cheaper for overseas buyers. as we have been reporting the labor department says consumer prices excluding energy and food rose 3/10 of a percent, the biggest gain since august of last year. triple the increase that was forecast by economists surveyed by bloomberg. this perhaps reduces tds of one half point rate cut at the federal reserve meeting next week, says our next guest, the chief bond market strategist at miller tabak and company. welcome, tony. thanks for being here. let’s talk first of all about what we’ve seen the past two days in the bond market with the 10-year treasury note. the uptick we’ve seen, we have it on the bloomberg in the short term chart. is this something people should react to very strongly.
>> the low interday yield got down to $327, it closed the day $322. this move is the biggest two-day uptick in yields this year.
>> you can see that here. however, at this point at the end of the chart --
>> if we look at it in the border context going back a year in this case two years, the increase in yield seems rather small.
>> why.
>> people are refinancing their homes. perhaps if the interest rate matters by the 1/8 or 1/4, but in the largest terms of what it means for the economy, we need a backup in rates that suddenly will be detrimental to economic growth.
>> the question on people’s minds is will the trend we see in the two-year chart continue or do you have an expectation there has been a change here that we see signs that are encouraging for people watching the economy?
>> the thing is with the c.pimentd rising 2/10 of a percent throughout the year, we don’t expect that, with the 10-year at 3.20, the yield spreads would be quite low. in fact, in the 1990 the yield spread between the 10-year and the inflation rate averaged about 3.5 points. so it’s very dicey for bond investors right now, because any rising inflation rate nudges the inflation rate upwards very close to the yield level because the yield level is so low on the 10-year.
>> they don’t want it to be a wash.
>> they want to make something. usually about 2.5 points to 3 points over the inflation rate. the presumgds has been that the economy might slip into a condition known as deflation where prices are falling.
>> is that not an issue anymore now that we see these --
>> it’s low because in the area that saw price increases in the months of may, are areas that are believable. recreation costs rose because of increase necessary movie tickets and concert prices and sporting events. we can relate to seeing price increases there. increases in medical care costs many can relate to. one other component, housing costs. we all sehome prices rising, therefore rents are rising. these are areas that are believable and perhaps then sustainable for the long-term. and we think the inflationary rate won’t decline and we won’t get to a deflation condition.
>> what does the fed do with this in mind?
>> the fed―the problems behind the half point rate cut expectations, the fed is worried about the risk of deflation. with the areas that showed increase necessary inflation in may, seemingly if you could extrapolate and think that there will be a continuation of that in the future, the risk of deflation seemed low. one other point. the increase in prices in the service sector are 3.4% year-over-year, it’s a large gain. there is no deflation evident at all, probably even disinflation in the economy in the service costs. so the fed probably does a quarter point move. i think at most 3/8. it’s unconventional.
>> that is unconventional.
>> i think that’s the most they’ll do is a quarter. because the financial markets are proygs powerful stimulus to the economy.
>> when is the last time they did an eighth of a point.
>> paul voulker’s time?
>> back in the 1980’s. there is so little room left and there are problems related to the fed funds rates the money market fund might become dysfunctional.
>> where would that go?
>> we are looking at a quarter to―it could be a half. the main thing in terms of stimulus, what the economy needs is getting a weaker dollar, stronger stock prices, tighter credit spreads, the difference between corporate bonds and treasuries, lower market interest rates like you see in the 10-year. so very strong stimulus from these four of what are known as transmission effect. it’s enough. and in fact the fed rate cuts aren’t as important in this context.
>> so do you anticipate people are going to be getting out of 10-year treasuries?
>> i think in july as the economic data shows more improvement, remember, yesterday we saw the new york empire state survey which is the survey of manufacturers, we saw a lot of strent. this might be a predicter of other strength in manufacturing data and we could see throughout july the sense there is a turn under way in the economy finally stock prices are providing competition for capital. you might see an exit, people all trying to go out that one little door and have a bit of a spike higher in yields. maybe 3.5, 3.75, nothing serious in terms of the yield level.
>> chief bond market strategist at miller tabak and company. shares of the six largest u.s. securities firm hit a 52-week high today reporting second quarter earnings ahead tomorrow. we’ve got the inside scoop on what to expect.
>> the broader stock market rally looked at a number of broker dealers to 52-week highs today. but it’s the bond market
