Thursday, October 7, 2010

Same Old No-Growth Surveys and the Treasury Market

Discover(R) card's Rasmussen-conducted U. S. Spending Monitor came out with its September survey. Here's the intro:

Consumers' views about the economy were unchanged from August to September, but the number of consumers feeling that their personal finances are getting worse rose for the sixth consecutive month and reached a nine-month high, according to the Discover U.S. Spending Monitor.

The Monitor, a poll of 8,200 consumers tracking consumer confidence and spending intentions on a daily basis, held steady in September, dropping just 0.5 points to 85.7. Overall, 57 percent of consumers rated the economy as poor, unchanged from August and 51 percent felt economic conditions were getting worse, just 1 point higher than August. But the number of consumers who felt their personal finances were getting worse rose for the sixth straight month to 49 percent. In April, just 43 percent felt their finances were getting worse. Economic and financial uncertainty has more consumers planning to trim discretionary spending in the month ahead.

This comports with the ongoing's daily reports on how people's individual spending patterns are, and on this week's ABC News Consumer Comfort Index, which reported:

A gain of sorts in optimism about the economy’s future isn’t reflected in views of current conditions: the ABC News Consumer Comfort Index is as bad as ever, indeed its lowest this week in the past two months.

The weekly CCI, produced for ABC News by Langer Research Associates, stands at -47 on its scale of +100 to -100, compared with its 24-year average of -13. After flirting with the low-40s, it’s back within sight of -50, its unofficial death zone.

The data continue to be consistent with the contained depression with a cyclical upturn scenario, otherwise known as the Japan scenario. For now, with the fall in the 2-5 year Treasury yields to all-time lows and in the 10-year yield to multi-decade lows except for a brief period in Dec. 2008-Jan. 2009, the financial world is holding together. There are no signs that the Grecian scenario of lenders pulling the plug on the U. S. is in the cards for now.

The absolute gap in yield between the 10 year and the 30 year Treasuries is at or near record levels, and perhaps more relevant is the ratio between the two, which at over 1.5:1 may have soared well into record territory.

The market is taking the rational approach, implicitly forecasting a return to historically normal interest rates in years 11-30. The flip side of that is that buyers of 10 year bonds are giving up the certainty of higher current return every year for the next 10 years for the possibility that in the longer term, sufficiently good investment returns will be available and will be chosen to more than make up for the higher current income.

Increasingly I am tacking to the long end.

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