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How the Bond Markets React 11.16.05
Best Times Past
Bond yields dropped last week even as the short-term Treasury offerings were ignored. The appetite for the 10-year bond remained strong even as the economy showed signs of slowing.
The shift in who is buying these securities has widened. Foreign investors are now coming to American shores as banks and institutions. They are buying 10-year Treasuries for one reason only: there is no better place to park their cash, much of which was generated by the citizens of the United States.
Trade deficits grew in the latest report issued last week and this is not good economic news. Federal deficits look to be on the rise as well and the American populous as a whole has shown itself to be uninterested in self-investment. In other words, we are still refusing to save.
It is hard to imagine any change in that mindset coming anytime soon. Faced with higher heating bills this winter, still higher than normal gasoline prices and the possibility that our current wealth effect, housing, will pull back in the coming year, have us in need of these foreign investors in a way we have not witnessed since pre-Revolutionary War times.
For the time being , foreign investors are still seeking our shore for their money. This is still pushing yields lower. Nothing like a riot or two in Paris to unsettle investors over the state of the Euro, the EU's lack of interest in raising their own interest rates, and the continued tightening of monetary policy here at home to send those anxious dollars home to roost.
As long as shareholder value is the top priority amongst the top companies, bondholders will be forced to take back seat risk-wise. Three things are affecting this attitude towards bondholders.
The economy, by most analyst's estimates, is still strong not great, but not weak either. Companies have lots of cash, some due to repatriation of funds from overseas, some from corporate cutbacks and layoffs. Equity prices have not followed enthusiastic reports of a strong economy. This forces companies to cater their shareholder base by issuing ever-increasing dividends and engaging in share buy-backs that increase shareholder value.
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