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Beige Book Sends Bonds Higher

blog | Published On 10/14/2015 3:39:11 PM by Steven Cochran
Federal_Reserve The Eccles Building, the headquarters for the Board of Governors of the Federal Reserve

A lackluster economic report from the Federal Reserve this afternoon dog-piled onto market sentiment, sending the yield 10-year Treasury note under 2% for the first time since May. A half-hour after the release of the Beige Book report saw the yield on the 10-year T-note at 1.98%.

The stock market, which had been trying to recover from WalMart's worst drop in 17 years, was sent back into the red on the Beige Book release.

Analyzing the Fed's Beige Book

According to the report, covering the last six weeks of economic activity in each of the 12 Federal Reserve districts, a strong dollar was the main culprit in dampening the economy. Six districts (New York, Philadelphia, Cleveland, Atlanta, Chicago, and St. Louis) reported "modest" economic expansion, while three (Minneapolis, Dallas, and San Francisco) characterized economic activity as expanding at a "moderate" pace.

The Richmond Fed noted that activity was still growing, but at a slower pace (perhaps putting them in the "modest" column), while Kansas City Fed reported economic growth as slightly weaker.

Federal_Reserve_Districts
  1. BOSTON growth (unspecified)
  2. NEW YORK modest growth
  3. PHILADELPHIA modest growth
  4. CLEVELAND modest growth
  5. RICHMOND slowing growth
  6. ATLANTA modest growth
  7. CHICAGO slowing to modest growth
  8. ST. LOUIS modest growth
  9. MINNEAPOLIS moderate growth
  10. KANSAS CITY slight decline
  11. DALLAS moderate growth
  12. SAN FRANCISCO moderate growth

Any Bonds Today?

Traders immediately took the repeated mentions of the problems a strong dollar was causing the economy as a signal that the Fed would not be raising rate until next spring, and piled into the longer-term Treasuries. Just last week, the 10-year Treasury saw the largest decline in other a month, as investors expected the Fed to raise rates before the end of the year.  The 1-year note hit a 2015 high of 2.5% in June, when a rate hike seemed all but certain for September.

bondsThe recent rally has been sparked by fears of a hard landing for the Chinese economy, as report after report come in under expectations. Add in the recent news that producer prices in the U.S. have fallen, and the attractiveness of Treasuries as a temporary safe haven can be understood. For the last two weeks, the three-month Treasury bill was auctioned off a zero percent, which has never happened before.

Lower treasury yields also enhance the attractiveness of gold to some investors, as the opportunity cost of bullion drops as yields shrink. Bonds, gold, and equities have apparently resumed their traditional relationship, with the first two acting as hedges to stocks. However, the hedging power of bonds is reduced, the closer yields get to zero.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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