This summer’s rally in bonds has given way to an autumn of volatility and, more recently, a sell-off which has pushed rates off of their historic lows. The 10-year treasury yield, which twice had dropped to the 1.70% area, has bounced back to 2.25%. On the mortgage side, Fannie Mae 30-year 3.50% coupon prices have dropped about three points over the last 3+ weeks and 4.0% coupon bonds have once again gained some traction.
While domestic U.S. economic data have shown some improvement of late with releases including the ISM manufacturing index, construction spending, and retail sales showing better-than-expected gains, news out of the euro-zone still has shown the power to drive equity and bond prices. Much of the recent rally in equity prices and climbing rates in bonds can be traced to growing comfort that the stronger European economies will do what’s necessary to protect the debt of the weaker nations – albeit with large haircuts to bond holders. Rumors have also swirled recently of the IMF providing a funding vehicle for the euro-zone crisis, which would bring into play funds from nations outside of Europe. It remains to be seen how significant a U.S. contribution would be to such an effort but both China and Brazil have shown some interest.
Notwithstanding the improvement in several economic indexes in the U.S., housing and employment remain weak. On the employment side, there was a small sigh of relief in the equity sector when September non-farm payroll growth came in higher than expected at 137k new jobs, but that number misstates the big picture. Many of the new jobs were part-time positions and the broader U6 employment measure, which includes under-employed workers, jumped significantly from 16.2% to 16.5%. There still appears to be a long way to go before the employment picture truly improves and while the news out of Europe still commands attention, the languishing economy in the U.S. will still provide a backdrop to intermediate-term interest rate projections