Macro Monitor

Still bearish on the bond market. From today’s low interest rate levels, there is not much upside, but downside is significant!

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Still bearish on the bond market. May deficit report encouraging.

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The current economic expansion will reach four years on 9/30/2005. Since WWII, the average expansion has lasted 57 months.

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Jim Floyd looks at the history of flattening yield curves. It is very rare for short rates to be rising with long rates coming down, which is what we are seeing in the current environment.

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Today, the yield curve has flattened but has not yet inverted. The economy may be in for a soft patch, but there are no signs of recession yet.

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The U.S. deficit was not a bond market negative in 2004, but continuing long term deficits will become a negative.

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The current economic expansion reached three years at the end of 2004. Since WWII, the average expansion has lasted 57 months.

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The current economic expansion reached three years at the end of 2004. Recession could possibly be getting underway by end of 2005.

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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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