Economic Event | Period | Economic Survey | Actual Reported | Original Prior | Revised Prior |
Empire Manufacturing | JUL | 4.00 | 7.39 | 2.29 | |
Advance Retail Sales | JUN | 0.2% | -0.5% | -0.2% | |
Retail Sales Less Autos | JUN | 0.0% | -0.4% | -0.4% | |
Retail Sales Ex Auto & Gas | JUN | 0.2% | -0.2% | -0.2% | |
Retail Sales "Control Group" | JUN | 0.2% | -0.1% | -0.1% | |
Empire Manufacturing Good
Retail Sales Bad, Very, Very, Bad
The New York Fed’s Empire Manufacturing Index is headed in a good direction, up 7.39, better than economists prediction of 4.0 and way better than June’s 2.29.
Advance Retail Sales is headed in a bad direction, -0.5%, much worse than economists prediction of +0.2%, and worse than May’s -0.2%. So, it doesn’t look like the consumer is going to bail out the economy.
NOW HERE IS AN INTERESTING LITTLE ARTICLE ABOUT FIXED INCOME IN GENERAL, AND TREASURY BONDS IN PARTICULAR.
Treasuries Doomsday 4 Years Away for Biggest Owner Vanguard
By Susanne Walker and Daniel Kruger
July 16 (Bloomberg) -- Vanguard Group Inc., whose $148.2
billion of Treasuries makes it the largest private owner of U.S.
debt, says the nation has until 2016 to contain its borrowings
before bond investors revolt and drive up interest rates.
“In the absence of a long-term credible plan, we are
somewhere around four years away on where the markets are going
to say ‘enough is enough,’” said Robert Auwaerter, head of the
Valley Forge, Pennsylvania-based Vanguard’s fixed-income group
since 2003 and who this year was inducted into the Fixed Income
Analysts Society Inc.’s Hall of Fame.
The U.S. has avoided the turmoil rocking Europe, where five
nations have sought bailouts as their borrowing costs soared
because investors boycotted their bonds. Instead, they have
sought U.S. assets as a haven due to the dollar’s status as the
world’s primary reserve currency, pushing note yields to record
lows even though the amount of public debt outstanding has grown
to $15.9 trillion from less than $9 trillion in 2007.
Demand for U.S. bonds and the dollar has bolstered
President Barack Obama’s ability to fund a budget deficit
forecast to exceed $1 trillion for a fourth straight year, and
helped Federal Reserve Chairman Ben S. Bernanke’s efforts to
keep borrowing cost low. The greenback makes up 62.2 percent of
all currency reserves, compared with 24.9 percent for the euro,
according to the International Monetary Fund in Washington.
‘A Pass’
“The U.S. Treasury gets a pass, in part because the
liquidity in that market brings buyers in that would maybe not
be there if there was a viable alternative,” Auwaerter, 56,
said in a recent interview at Vanguard’s headquarters, where he
oversees about $675 billion of fixed-income assets.
Vanguard’s flagship bond fund, the $110 billion Total Bond
Market Index Fund, returned 6.98 percent over the past five
years, beating 64 percent of its peers, according to data
compiled by Bloomberg. The world’s largest bond fund, the $263.4
billion Pimco Total Return Fund, which unlike Vanguard’s is
actively managed, gained 9.44 percent in the same period.
The 10-year Treasury yield fell six basis points, or 0.06
percentage point, last week to 1.49 percent, according to
Bloomberg Bond Trader prices. The 1.75 percent note due May 2022
rose 18/32, or $5.63 per $1,000 face amount, to 102 12/32. The
yield was 1.47 percent at 8:25 a.m. New York time.
The yield, which touched a record low of 1.44 percent on
June 1, is down from this year’s high of 2.4 percent on March 20
as global growth slowed and compares with the average of 4.88
percent over the past two decades.
‘Little Upside’
Even with record-low yields, Treasuries maturing in 10
years or more have returned 7.4 percent this year, including
reinvested interest. The Standard & Poor’s 500 Index of stocks
has gained 9.1 percent, including dividends, and commodities as
measured by the S&P GSCI Index have lost 3.6 percent.
Investors aren’t getting paid enough for the risks of
holding the debt, Elaine Stokes, a money manager at Loomis
Sayles & Co., who helps oversee the $21 billion Loomis Sayles
Bond Fund, said in a July 11 telephone interview.
“There’s very little upside, but there’s all kinds of
downside,” Stokes said. “There’s a finite timeline to some of
the issues that we’re facing. It’s no longer that we can keep
kicking the can down the road,” she said in reference to
lawmakers who keep raising the nation’s $16.4 trillion debt
ceiling instead of reducing borrowing.
Term Premium
Investors would lose $1.08 million, or 10.8 percent, for
every $10 million invested in 10-year Treasuries if yields were
to rise to 3.8 percent by December 2014, the average for the
past decade. Loomis Sayles sees yields between 2 percent and 2.5
percent a year from now.
The term premium, a model created by the Fed that includes
expectations for interest rates, growth and inflation, showed
Treasuries are the most expensive ever. The gauge fell to a
negative 0.9617 percent on July 10 from negative 0.2265 percent
in July 2011. It averaged positive 0.8579 percent in the decade
before the start of the financial crisis in mid-2007.
With $1.9 trillion, Vanguard is the largest mutual-fund
manager in the U.S., having grabbed the top spot from Fidelity
Investments in 2010. Its Treasuries holdings rank ahead of
Newport Beach, California-based Pacific Investment Management
Co., with $110.2 billion, data compiled by Bloomberg show.
The firm ranks ahead of Russia and just behind Switzerland
as the eighth-largest U.S. creditor. The Fed, with $1.66
trillion, is the biggest, followed by China at $1.15 trillion
and Japan with $1.07 trillion.
Nelson’s Flagship
Auwaerter joined the company in 1981 to manage municipal
bonds and money market funds. He now oversees a staff of 115,
who are called crewmembers in keeping with a firm named for HMS
Vanguard, one of British Admiral Horatio Nelson’s flagships. He
spends his work days in the middle of a 5,400-square foot (1,700
square-meter) trading floor in a building called Victory, named
for Nelson’s flagship at the Battle of Trafalgar in 1805.
“There’s constant interaction,” he said. “We argue about
things with the idea that everybody can be challenged on any
viewpoint.”
With a bachelor’s degree in finance from the University of
Pennsylvania’s Wharton School and a master’s in business
administration from Northwestern University’s Kellogg Graduate
School of Management, Auwaerter has during his career testified
before Congress on matters pertaining to the fixed-income market
and trading.
‘Difficult Markets’
“He’s been through a lot of difficult markets over those
30 years,” said Stephen Lessing, global head of senior
relationship management in New York at Barclays Plc, a 32-year
bond-market veteran who first met Auwaerter in 1981.
Congress will have to work with the winner of this year’s
presidential election -- Obama or presumptive Republican
challenger Mitt Romney -- to pass a plan within three to five
years that puts the U.S. on a path toward sustainable budgets,
Auwaerter said.
“With health care plus the demographics of the Baby Boom
generation and the pressure that’s going to put on Social
Security, all those things are going to come to a head over a
three-to-five year time frame,” he said. “In a three- to five-
year time frame the market can start to look at us like an Italy
or Spain and start to assess a credit risk premium to U.S.
Treasury yields.”
Marketable Debt
In Italy, whose more than $2 trillion of marketable debt
outstanding ranks as third-most behind Japan and the U.S.,
yields on 10-year bonds have soared to more than 6 percent from
less than 4 percent in October 2010. The spread to benchmark
German bunds has widened to about 4.8 percentage points from
about 1.5 percentage points in that period.
With taxes set to rise and spending cut by $1.2 trillion if
Congress fails to agree by Dec. 31 on ways to reduce the
deficit, the so-called fiscal cliff facing the U.S. might
imperil an economy that is already slowing. The International
Monetary Fund will this week cut its 3.5 percent estimate for
global growth this year, Managing Director Christine Lagarde
said July 12.
Goldman Sachs Group Inc. and Bank of America Corp., two of
the 21 primary dealers of U.S. government securities that trade
with the Fed, say the central bank will likely keep its
benchmark rate at almost zero until mid-2015. Credit Suisse
Group AG, another primary dealer, said in a report July 13 that
10-year yields will end next year at about 1.75 percent.
“The threats of what could drive rates higher have been
out there for a long time and has not inhibited us from getting
to this stage of the game,” David Ader, head of U.S. government
bond strategy at CRT Capital Group LLC in Stamford, Connecticut,
said in a telephone interview July 9. “The global economy is
slowing and the dollar looks like the least pathetic thing and
that’s going to keep bond flows coming in. This is where we are
going to be: low rates for a long, long time.”
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