Market Commentary

Former FRB Chairman Alan Greenspan stated Friday
March 29, 2010

Former FRB Chairman Alan Greenspan stated Friday the recent rise in Treasury yields represents the proverbial “canary in the coal mine” that may further suggest higher rates in the not so distant future.  The yield on the 10-year and 30 year treasury has surged about 20 basis points since the passage of the health care bill last Sunday.

Greenspan shares my view the basis for the recent uptick in rates is concerns over “this huge overhang of federal debt which we have never seen before,” perhaps endangering the incipient housing and economic recovery.

This concern regarding the country’s fiscal health is reflected in interest rate swap spreads as spreads declined to the lowest level on record.  As widely noted the budget deficit reached a record $1.4 trillion for 2009 and is expected to average of $1.2 trillion in 2010-2012 as per the CBO.

These deficits are the result of massive government spending for as also per the CBO, government spending in 2008 amounted to $2.97 trillion, $3.52 trillion in 2009 and an estimated $4.42 trillion in 2010.

I find these numbers as incomprehensible.

As noted several times and as per First Trust, the interest cost to service the national debt is 1.3% of GDP, considerably lower than the 3% experienced in the 1980s and 1990s.  The average maturity of US government debt is at a generational low of 4.5 years, again as per First Trust. 

What happens if yields rise dramatically, partially the result of unconstrained fiscal spending?

About 3 years ago [February 2007] I asked were the problems in the two Bear Stearns hedge funds the “proverbial canary in the coal mine” rhetorically stating I am sure that these relatively small sum of monies were not the only sums invested in this [that] fashion.

The funds quickly rebounded for a myriad of reasons only to file for bankruptcy in June 2007.  As we all know these funds were indeed the proverbial “canary in the coalmine” as the financial system today is vastly different than 3 years ago, reasons similar to why the two Bear Stearns hedge funds failed.

What will occur this week?  Equity trading is closed Friday because of the Good Friday holiday.  The bond market however is not.  Friday is also the day March’s employment data is released.  Consensus is suggesting a 190,000 increase in nonfarm payrolls.  If the data is shockingly stronger as was the case in March 1994 (data also released on Good Friday), bonds will get killed given the lack of participants.  If I recall correctly treasuries were crushed about 4 points.

Other data released this week is personal spending/income, CaseShiller home price index, consumer confidence, several regional manufacturing indices, the ISM and various private employment surveys.  All data could greatly influence trading.

Commenting briefly on Friday’s action, stocks again reversed a handsome advance on the news of a sinking of a South Korean War ship. Treasuries were essentially unchanged.

Last night the foreign markets were up. London was up 0.01%, Paris up 0.21% and Frankfurt up 0.66%.  Japan was down 0.09% and Hang Sang up 0.88%.

The Dow should open higher on the belief that the US economy is the second pillar of strength in the global economies behind China.  Will Friday’s jobless data support this view?  As widely expected the economy is expected to the most amount of jobs in three years. The 10-year is off 7/32 to yield 3.88%.