New York To Open With A Relief Rally, And Bond Yields Will Stay Low

Last week, the debt ceiling impasse cost US equity investors $680 billion last week. But weekend promises of a deal to raise the debt ceiling over the weekend are probably good enough for a Monday rally in New York. Further, history has been kind to the Dow Jones Industrial Average in the year before presidential elections, rising by an average 12%. So far in the third year of President Obama's first term, the DJIA is up only 4.9%, for the smallest increase since the streak of gains began in 1941. Although a U.S. downgrade or partial default would be directly linked to Treasuries, bond markets are signaling investors would flee riskier assets for the perceived safety of fixed income. Treasury yields average 0.72 percentage point less than the rest of the world's sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January. Ten-year Treasuries surged last week, driving yields as low as 2.77 percent on July 29, the lowest level since Nov. 30. Further, the fact of life is that Treasuries are responding more to the weak U.S. economic data than the debt ceiling debate. Moreover, US treasury yields remain in a 30-year downtrend because of a secular shrinkage in inflationary expectations as potential nominal GDP growth in the U.S. continues to shrink.... Read more

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