Macro Monitor

Lower than expected 2004 budget deficit was a short term bond market positive, but longer term deficits are a negative.

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Deficit narrowing. Last three months’ (including first month of fiscal 2005) receipts remarkably strong, while outlays have declined.

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Everyday consumers must find it difficult to believe twelve month inflation is just 2.5% (CPI-U), especially when filling up their gas tanks and their grocery carts.

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Bond yields have declined 40-55 basis points in the past three months.

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Falling interest rates and declining oil prices should bolster consumer spending and hopefully get us past the current economic soft spot.

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GDP growth of 4.0% projected for 2004. Improved 2004 budget deficit projections a short term positive for bonds but eventually could be a negative.

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GDP growth of 5.0% projected for 2004. But, fast growing U.S. budget deficit ($507 billion in 2004?) is a significant problem for bonds.

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GDP growth of 5.0% projected for 2004. But, fast growing U.S. budget deficit ($483 billion in 2004?) is a significant problem for bonds.

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Don’t get drawn into the TIPs trap. Lack of attractive bond opportunities and prospects for higher inflation may draw investors to Treasury Inflation Protected Bonds. However, there is still risk of significantly higher interest rates, and the fact the inflation factor is tied to an unreliable CPI.

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The spread between Long Quality Corporates and twenty year Treasury bonds is back down to a normal level, as the Treasury shortage elimination-thesis has fallen apart due to rising budget deficits.

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GDP growth of 5.0% projected for 2004 (6% in the first half, 4% in the second half). But, fast growing U.S. budget deficit ($475 billion in 2004?) is a significant problem for bonds.

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Fast growing U.S. budget deficit ($374 billion in 2003) is a significant problem for bonds. Project 2004 budget deficit will expand to $535 billion.

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GDP growth of 5.0% projected for 2004. But, fast growing U.S. budget deficit is a significant problem for bonds.

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New study by The Leuthold Group suggests below average Long T-bond returns can be expected from today’s below average Long T-bond yield of 5.19%.

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Economy picking up steam in second half. Early Q3 GDP estimate much better than expected.

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Economy picking up steam in second half. Revised Q2 GDP better than expected.

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New study by The Leuthold Group suggests below average High Yield bond returns can be expected when Junk yields fall below 9%.

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Fixed income hedge in portfolios was reduced by one-half in mid-August following the spike in bond yields. TIPS for fixed income investors?…..You can lose money on Treasury Inflation Protected Securities (TIPS). You are protected against inflation but not sharp rise in interest rates.

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GDP growth of +4.0% projected for 2003. But, fast growing U.S. budget deficit is a significant problem for bonds.

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High Yield bonds rated marginally attractive after continued spread narrowing.

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