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U.S. Bond Prices Being Driven by Good News for a Change

Interest-Rates / US Bonds Feb 01, 2011 - 02:39 AM GMT

By: John_Handbury


Treasury Bond prices usually flourish during bad times.  Joblessness, recessions, lack of spending, usually drive bond prices up because a stagnating economy usually means lower interest rates and disinflation.  These times are different however.  Over the last few months we have seen a large drawdown in bond prices without a whiff of inflation.    Why aren’t bond prices higher?

There are only three components to bond prices.  Inflation, risk, and the cost of borrowing money.  Inflation is low. The cost of borrowing money hasn’t changed. Therefore the only thing that can be driving this downward trend is the risk component. But hey, treasury bonds are risk-free, because they’re guaranteed by the US government!  Recent events have put this belief into question. European countries with debt-to-GNP ratios not too unlike the US are seeing their bond yields go through the roof.  There seems to be no attempt by the government for fiscal restraint.  There is no hard plan to reduce the deficit.  Actions to curb spending now require bi-partisan agreement which seems unlikely.  All these factors in a moribund economy are driving down bond prices.

So for a change it’s good news now that is driving bond prices.  Every cheerful report, be it employment, retail sales, durable orders, PMI, GNP, is HELPING bonds.  This is because it indicates that the economy is getting better, and the US won’t default on its bonds.  Every discouraging report is now HURTING bonds.  Just the opposite from what we’re used to.  The trend is clear.

Let’s test it this Friday when the payroll report comes out.  If it’s negative, the first reaction will be our usual knee-jerk response: Bond prices will initially go up.  But start selling. Look for prices to back down over the next few days.  Vice-versa if the payroll report is positive.  Could be a chance to make some money.

By: John Handbury Independent Trader

© 2011 Copyright John Handbury - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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