<p>Dr</p>
Friends and Colleagues
Summer
is in the air, and with it, a sense of muted optimism…or so we are told. Scott Anderson of Wells Fargo Economics
wonders aloud whether the recent rise in
Treasury rates may be foreshadowing the end of the “recovery”. Read on to see why we need to keep our eyes
on treasuries in the weeks and months ahead.
Recovery?
By certain measures, we have
been in a recovery recently.
· The S&P 500 has
gained about 34% since its March low.
· Initial jobless
claims seem to have peaked at the end of March, and have been trending down
since then.
· Consumer
confidence has jumped to 54.9 in May from 25.3 in February.
Lots of green shoots, and life
is all good…right?!
But…
Anderson warns us that rising
long-term Treasury yields have the potential to wilt the green shoots.
He cautions that rising rates have
the potential to cancel out the Fed’s effort to lower the cost of borrowing for
consumers and businesses.
He projects that 30-year mortgage
rates moving over 5.0% will slow refi and home purchase activity.
This would cause house prices
to fall further, and would keep consumer spending at a tepid level.
He worries that if these things
occur, it would cause a downgrade for the overall economy.
Watch That 10-year Treasury
Yield!
Anderson contends that watching
the yield on 10-year Treasuries can be a good single indication of the
direction of the economy as a whole.
As examples, he cites the
following:
·
If the dollar
takes a dive because the Chinese are getting nervous about the federal debt or
U.S. inflation, it will show up in rising 10-year Treasury rates.
· If the Federal
government decides to change its spending, tax, or borrowing plans, it will
cause rising 10-year Treasury rates.
· As the Fed
adjusts or even thinks about adjusting
its monetary policy and Treasury purchase programs, the impacts are immediately
reflected in the ten-year Treasury yield.
Speaking of the
Fed Buying Treasuries….
Per Anderson,
the recent run-up in Treasury yields is partly due to the belief that the Fed’s
commitment to buy $300 billion in Treasuries by this fall will not be enough to
stem the flood of new supply as the government tries to borrow its way to
prosperity. Resulting speculation says the Fed may soon have to expand its
Treasury purchases to keep the recovery alive.
And About the
Fed Buying MBS….
As an
alternate strategy, Anderson suggests the Fed could increase its purchases of
mortgage-backed securities (MBS).
· The
Fed has already purchased $427.6 billion of agency MBS.
· They
have current commitments to buy up to $1.25 trillion this year.
· This
has helped lower spreads between the ten-year Treasury and MBS.
· This
keeps banks from having to pass along the full increase in Treasury yields onto
the residential mortgage market.
Is the Cup
Half Empty or Half Full?
Anderson
concedes that a rise in long-term bond yields and a steepening yield curve is
not always a bad thing.
It can also
signal renewed economic growth and recovery.
However, this
time he contends the cup is half empty, as he believes the recent rise in rates
has been more about fears of future inflation and the dollar, federal borrowing
and Fed purchase programs.
Anderson is an
economist….which means he may be right, and he may be wrong.
What do you
think? Will the consumer recovery
continue, or are more dark clouds looming on the horizon?
As always, our
saga continues, so stay tuned…..