This morning's Wall Street Journal (page C6 in the print edition) brought this news:
Bond investors, worried about slackening home sales, nudged the threat level on their economic early-warning system a notch higher yesterday.
In an unusual event known as a partial inversion of the yield curve, investors kept buying five-year Treasury notes until their yield, which reflects expectations of how the economy will fare over the next several years, fell below the yield on two-year notes, which tracks expectations of what the Federal Reserve will do with interest rates in the shorter term.
As is often the case, things looked a little different at the end of the day. This is from tomorrow's Wall Street Journal -- miraculously available at 9:21 PM the day before:
A surge in new-home sales last month and more confident consumers yet again helped blur the longer-term outlook on the economy and interest rates.
That weighed heavily on U.S. Treasurys yesterday and reversed a trend toward higher prices and lower yields that had emerged over the past few weeks.
That prompted this:
"There are a lot of important questions plaguing the bond market right now, and nobody has the definitive answers," said Jason Evans, head of government-bond trading at Deutsche Bank in New York...
By Monday, fears that the Federal Reserve might be dangerously close to pushing interest rates too high and further choking off growth caused a partial inversion of the yield curve, a rare occurrence in the bond market that usually warns of recession ahead. That inversion reversed yesterday, with the five-year note yielding a sliver more, rather than less, than the two-year note at 4.406%.
But a steady stream of bullish economic data now has some questioning that outlook. An increase in consumer confidence this month, propelled by falling gas prices, hearty online spending, strong chain-store retail sales and a record 13% increase in new-home sales in October, has reminded investors of the Fed warning that future monetary policy will be highly data-dependent.
Not everyone is so sanguine. Kash at Angry Bear documents the fact that, yes, the spread between long and short maturity Treasury yields is pretty darn low, and puts "this in the category of Not-Very-Good-Signs for the economy in 2006." And James Hamilton -- who has been warning about the possibility of an inversion -- explains exactly why this might be a Not-Very-Good-Sign.
Furthermore, some are convinced that the economic news is something less than advertised. Ben Jones tracks down a MarketWatch analysis that comes with a warning that "the new-home sales report is well known for its revisions" and "according to the Commerce Department, it's not certain that sales rose at all during October." And Barry Ritholtz says don't believe the hype about retail sales, the housing boom is done and consumer spending is going with it.
Not that there aren't optimists out there. Calculated Risk thinks that "pronouncements of the demise of the housing market now appear premature." At Bloomberg, the economy is described as "buoyant" (hat tip, Michael Mandel). Although slightly less enthusiastic, William Polley still thinks it was "a pretty good day for economic date."
Can the optimistic outlook carry the day? Sure. But as I noted yesterday, financial market participants seem to be anticipating a federal funds rate by March that is better than 25 basis points above the current 10-year Treasury yield. I'm not sure which one it is, but one piece of this puzzle just doesn't seem to fit.