Macro Monitor

The bond market was fighting to stabilize in February, folowing the "surprise" January decline.

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It was all downhill for bonds in January.

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I continue to believe that at least a mild recession is in the cards for 1990 and that the deficit will soon start to expand. However, I no longer think this will be a strong negative in terms of bond market psychology, at least not over the next six months or so.

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Inflation continues to cool and the economy is providing more evidence of slowing, but we still have our reservations about the bond market and remain cautious.

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It still appears to be premature, but we are giving serious consideration to adding a package of selected high yield corporate bonds to the fixed income component of the two asset allocation models.

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A lackluster T-bond rally in the first half of September seemed to be primarily a flee to quality as junk bonds were trashed. Then in the last week or so T-bonds have moved lower, even as the junk market stabilized.

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In August, the dollar was strong and inflation fears continued to wane. So why were most long-term bonds down 2-4 points? We can blame the economy, or at least Wall Street’s perception of the economy.

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The bond market marked time for the first three weeks of July, but came on strong in the last five trading days. July gains in bonds did not keep pace with stocks, but most bonds were up a point or so for the month.

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In June, the bond market appeared to be unstoppable. After a pause mid-month, prices came roaring back edging into new high ground at month end.

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With Aussie Commonwealth bond yields again up around 14% and the Aussie dollar down to $0.75 U.S., we are moving part of the fixed income portion from both the asset allocation models back into the Aussie bond market.

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For quite some time this publication has had a pretty good feel for the bond market. But May surprised me. My expectation was a stronger market early in the May followed by a correction.

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With at least some preliminary signs the economy is slowing, accompanied by more comforting PPI and CPI numbers, it would appear the Fed is relaxing a bit.

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In mid-March, the bond market was jolted by a nasty PPI number and spent the rest of the month creeping back to pre-PPI release levels. The net result was an unchanged to slightly higher bond market in March.

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In February, stocks and bonds tracked the same course. The CRB Index came down significantly in February and was close to breaking down before a late month surge. The JOC Index remains above its January breakout level.

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This is indeed a strange environment, where higher short-term rates in effect have become a bond market positive. High short rates cool the economy and keep the dollar strong. Both of these consequences are bond market positives.

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To use the old cliche' for lack of a better term, the bond market backed and filled in December.

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Forget about the economy, forget about the uptick in the CPI, and forget about the bulge in bond supply. U.S. interest rates rose in November because the dollar went down.

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Wall Street's financial mechanics created chaos in the high grade corporate bond market last month. With exceptions, the LBO frenzy has destroyed, at least for the time being, the usefulness of bond quality ratings. The damage done to many bond portfolios was massive.

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The Gods of the bond market were kind in September, with the bond market performing exactly as we thought it would.

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