Equity markets are set to open higher this morning while treasuries are little changed. Pending Home Sales data is set to be released at 10:00 AM EDT. The street is forecasting more modest gains than indicated by last month's data. The street is focused on employment data set to be released tomorrow and Friday. Tomorrow we have Jobless Claims and ADP Employment. Friday brings Nonfarm Payrolls and the Unemployment Rate.
In fact, some people already know what the data will say. Equity markets rallied and treasuries sold off after both President Obama and Vice President Biden independently commented that Friday's employment data will be strong. After the close critics dismissed our leaders' enthusiasm by pointing out that many of these jobs were temporary, such as census workers or Gulf cleanup personnel. Both the president and vice president broke an unwritten rule by tipping the numbers before their release. I guess different rules apply to different people. Those looking to invest at the same level or above the government in troubled companies. The government can do what it wants and leap-frog you, cram you down, etc. if it deems it necessary to do so.
Yesterday's Wall Street Journal Credit Markets column discusses how the drop in long-term interest rates caught investors by surprise. I hate to spoil the excitement surrounding the article, but while many investors and some economists were surprised, many, if not most, bond market participants (traders, managers and strategists) were not that surprised. Most bond market participants had their year-end 2010 10-year treasury yield forecast with a 4.00% handle (there were some notable exceptions). Some of us were in the lower end of the 4.00% range. The problem with investor sentiment is that investors tend to be equity oriented and rely on historical trends without putting historical data into their proper contexts. never before has the U.S. provided current amounts and types of stimulus in a global economy in which many of its trading partners are also experiencing economic difficulties.
The article states that many experts were surprised that U.S. treasuries were used as the global safe haven. Where did they expect money to go? Europe (problems worse than ours)? Japan (low rates and deflationary). China (can't deliver the bonds outside of China and it has its own asset bubble)? Emerging Markets (not large enough and are dependent on the developed world for their economic activity)? Gold was the only alternative, but even gold has its limitations (delivery, etc.). Nope, it all comes down the the U.S.A., the least ugly girl at the dance.
This is not to say that long-term won't be higher this time next year. Inflation is likely to be modestly positive and long-term rates are likely to follow suit. Those buying TIPS and floaters to outperform the market will likely be disappointed, at least for now. Buy TIPS as a hedge against unexpectedly-high inflation and buy step-ups for unexpectedly-high interest rates. Hedge is the operative word here.