Market Commentary

The yield curve between the two year and thirty year treasury is the widest since at least 1980 as per Bloomberg.
December 11, 2009

The yield curve between the two year and thirty year treasury is the widest since at least 1980 as per Bloomberg. The 372 basis points spread is validating my view that the economy is indeed recovering at a pace faster than expected perhaps suggesting an “un anchoring” of inflationary expectations.

To place today’s environment into the proper perspective and as per Bloomberg at the end of 2008 the spread was 191 basis points versus the five year average of 132 basis points.

Some will make the statement the reason why the curve is so steeply sloped is the result of the expected huge supply of treasuries that will come to market next year to fund government spending. 

While I do think this view does have some merit, I don’t think government spending is at the proverbial tipping point where supply will swamp demand.  We could get there in the future if Washington does not curtail its fiscal habits but not today.

I think there will be a change in monetary policy earlier than many expect causing the yield curve to flatten as yields in the front part of the curve (five years or less) rise dramatically. 

If history during the last two tightening cycles is too serve as a guide, longer dated bonds should not be adversely affected as the market would become convinced the Federal Reserve is ahead of the proverbial inflationary curve.

Commenting briefly about yesterday’s market action, stocks rallied led by consumer discretionary issues partially predicated by the average number of Americans filing for first time job claims over the past four weeks fell to a one year low.  The trade deficit was also lower than expected as a weak dollar boosted exports.

Today is relatively heavy data day.  Retail sales, University if Michigan confidence survey, business inventories and import prices are all released.

Last night the foreign markets were up. London was up 1.10%, Paris up 0.67% and Frankfurt up 1.14%.  Japan was up 2.48% and Hang Sang up 0.93%.

The Dow should open moderately higher on the news that China’s factory output climbed about 19% from a year earlier. The 10-year is off 1/32 to yield 3.50%.