SCOREBOARD: Bond bubble banter

When I look at the screens, the standout feature for me is the sharp rise in US bond yields. Since Friday, the 10-year yield is up some 13 bps (3 bps last night) and it now sits just below 2 per cent (1.98 per cent).

This is the highest yield since about April last year (with the 5-year up 10 bps to 0.88 per cent and 2-year up 5 bps to 0.3 per cent). Not that it would take much to see it back down 13 bps mind you and I suspect the Fed is hatching plans for just a move. For now though there is a lot of talk about the bond bubble bursting and large flows out of bonds and into equities. That's why we've seen big move over the last couple of days.

You look at the fundamentals – this is talk you should take seriously as there is no way a sensible or reasonable person would even try to justify yields like this on the fundamentals. Yields below inflation rates? Really? But that's been the case for years.

The fact is yields haven't been a signal for the market for a long time – and that's because the pricing signal is being distorted by government intervention. Or rather the magnitude of that invention. The Fed is the largest holder of US Treasuries, the BoE gilts – consequently, low yields tell you nothing about market expectations or fears. As to when this stops, it is arbitrary. A political decision. Another 12 months or three years – who knows?

This is why no matter how attractive returns to bonds have been lately, retail investors should keep clear of government bonds. Resist the pressure to buy them – and a lot will be applied; any ponzi scheme requires a greater fool to sell to – and you can guarantee one thing. Retail investors will be the last to find out when there is a change of policy – and you don't want to be sitting with any bonds on your plate when the printing presses stop.

Anyway, all the action seems to have been on the rates side because stocks have done little since Friday and for last night are mixed around 0. With about an hour to go the S&P500 is down 0.04 per cent (1502), the Dow is 5 points higher (13901) and the Nasdaq is 0.3 per cent higher (3159). I suspect investors are waiting for payrolls later this week but in the interim, we did see some solid data last night.

US durable goods orders rose 4.6 per cent in December, more than double the expectation for 2 per cent and following a 0.7 per cent increase in November. So-called core orders were softer at 0.2 per cent but this was still better than the -2 per cent expectation and it followed a 3 per cent gain the month prior this is a good result. The only downside came from ending home sales which fell by 4.3 per cent in December following a 1.6 per cent gain in November. Other than that, the Dallas Fed manufacturing index was down a little – to 5.5 in January from 6.8 in December.

In price action elsewhere, the Australian dollar hovered around 1.0412, which is little changed from Friday, while euro is up about 70 pips to 1.3456. Sterling is then down about 70 pips or so, while the yen is at 90.75, up a touch from Friday afternoon. In the commodity space, crude rose 0.6 per cent last night and is 1 per cent higher from Friday, while gold is off $12 to $1653, $3 of that last night.

Bits and pieces otherwise. Moody's downgraded six Canadian banks citing high consumer debt levels – which hit a new record – and rising house prices. They are concerned about the consequences of a correction. Well done to the Bank of Canada, might I add. Learn nothing from the GFC?

For Australia today, we get NAB's business survey for December. Confidence currently is shot at -9 which compares to an average of about 6. Same with business conditions. These are the worst readings since the GFC and are usually associated with recession. The fact is though we are not in a recession or downturn. I know there are some snake oil salesmen and ‘economists' who shame themselves and the profession by using these terms or something similar (or they did use them only late last year) due to weakness in housing and manufacturing (roughly 12 per cent of the economy). Remember though that just because someone says something, no matter how many baubles they have or what status is conferred by whatever institution they work for, there is and never has been supporting evidence for the economy more broadly. There is wisdom in the saying "all that glitters is not gold” – and that's especially the case for advice and analysis.

There isn't much else outside of the confidence figures – either today or the rest of the week – the most important data is probably the Reserve Bank's credit figures on Thursday and RP Data's house prices on Friday.

For the US, the key data tonight is the S&P/CaseShiller house price numbers, but its unlikely these will cause much of a stir. Instead investors will be waiting for payrolls on Friday and perhaps the FOMC meeting (decision Thursday morning at 0615 AEDT).

That's the lot, have a great day…

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

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