August 16

GoC yield curve this morning (& relative to levels in April, when we had the peak yields of 2010):
2s @ 1.35%, down from 2.07%;
5s @ 2.13%, down from 3.24%;
10s @ 2.94%, down from 3.75%;
longs @ 3.57%, down from 4.13%

the DEX Universe bond index is up 5.5% YTD, with credit still having outperformed this year:
Canadas are up 4.8%, vs.
provincials up 6.0% and
municipals and corporates each up 6.1%

short-term Canadas are up 2.8% YTD,
mid-term Canadas up 6.7%,
long-term Canadas up 10.2%

in the U.S., 2s, 5s, 10s and longs are @ 0.5%, 1.4%, 2.6% and 3.75% respectively

historical chart courtesy of zero hedge

the 10-yr Treasury has rallied 140bps since April and is now at the lowest yield it has ever been --- with the exception of the one-month period from mid-December 2008 to mid-January 2009 (during the deflationary-scare period of the great recession) --- despite total public debt outstanding held by the public having increased this year by over a trillion dollars (YTD) to $8.8 trillion

so, we've had a pretty healthy bond rally; is it time to take profits? nope. long-term bonds may not be as attractive as they were a few months ago, but there's lots of upside left; yields can certainly go lower; and they can stay low for an extended period (see Japan) if economic growth remains anemic and if stocks remain a risky proposition; with a duration of about 16 years, the long bond could give you a 10% return from price appreciation alone if its yield drops to around 3%, and 16% if it drops 100bps

and that may not be the end of the rally, as pictured by zerohedge:

okay, so I don't buy that

but we've had a long-term downward trend in yields:

and until that downward long-term trend channel is broken, or there's convincing economic information to think it should be broken, I think the trend stays intact:

and given the weakness I anticipate in the economic data in the second half of this year, I put much greater odds on seeing the trough of that trend channel than revisiting the topside of the channel

Bonds Sneeze, but Is It Contagious? Michel Santoli, Barrons.

The risk isn't necessarily that there's a bond "bubble," as is commonly heard (especially from folks who sell stocks). A bubble requires that the public be whipped up into a state of enthusiasm over some grandiose "story" about a certain asset class. That isn't happening, unless one considers the sober demographic argument in favor of income instruments.

Is a crash coming? 10 reasons to be cautious. Brett Arends, WSJ.

Monetary policy for the 21st century. Steve Waldman, interfluidity.

The signal fact of the Great Moderation was that the marginal unit of CPI was purchased from asset-related wealth and consumer credit rather than from wages. Under this circumstance, central bankers could fine-tune the economy without disruptive business cycles. When resources, especially humans, were under-employed, expansionary monetary policy could be used to inflate asset prices and credit availability, until increased expenditures on consumption goods took up the economy’s slack. When inflation threatened, contractionary monetary policy restrained asset price growth and credit access, reducing the propensity of the marginal consumer to spend. (“Asset-related wealth” includes speculative gains, the capacity to borrow against appreciated collateral, and the increased willingness of consumers to part with wages and savings due to a “wealth effect”.)

Regular readers know that I am not a fan of the Great Moderation. Central bankers and economists found it pleasant at the time, but sustaining that comfort required that cash wage growth be suppressed, that credit be expanded regardless of overall loan quality, that asset prices be frequently manipulated, as means to a macroeconomic end. In exchange for price stability and moderate business cycles, we mangled the price signals that ought to have disciplined capital allocation, we levered and impoverished American households, we transformed our financial system into a
fragile and corrupt cesspool of self-congratulatory rent-seekers. I call that a very poor bargain.

There will be no double dip... Egon von Greyerz, Matterhorn Asset Management.

data:

ECRI WLI (at -9.8), Consumer Metrics Growth index still pointing to recession risks;

so is the Aruoba-Diebold-Scotti Business Conditions Index, another index designed to track real business conditions at high frequency, produced by the Philly Fed

the slight blip-up at the tail-end of the graph is due solely to payrolls data (only payrolls and intial jobless claims are available so far for July)


other fare:

lotsa media coverage of China leap-frogging Japan as world's 2nd-largest economy;
but should the size of a country's economy relative to that of other countries be dictated by a pegged exchange rate?
China Has Long Been the World's Second Largest Economy: NYT Kills Electrons for Nothing. Dean Baker, CEPR.