Friday, November 2, 2012

It's The Economy Stupid: A Bond Guy Looks At The Numbers

I am a bond guy.  Basically have spent my entire career dealing with fixed income securities.  So when I look at economic stuff I always look at them in light of how they will likely affect bonds. 


US Treasury 10 Year Note 1.625% Coupon 08/15/2022 Maturity:  Bid 98-25+ / Ask 98-26 / Bid Yield 1.758%


The 171k increase in non-farm payroll employment came in better than expected and the 84k upward revision to the prior period’s number indicates that the number is not a fluke, but confirmation of a SLIGHTLY better trend in numbers.  Keep in mind that the three month moving average for job creation was basically unched (unchanged). Don’t get all happy and joyous just yet, cause these numbers just mean the economy can sustain about a 2% GDP growth rate.  Not exactly a gang buster number.  


The numbers seem to suggest that the recent trading range for the 10-year Treasury note (currently yielding 1.75%) will probably hold and we are more likely to see a 1.50% yield on the 10-year Treasury before we see a 2.0% yield on the 10-year Treasury.   But that’s just for the current trading range.  Long term I think bond yields are going up, bond prices are going down.  When I think that the “long term” is going to start keeps getting pushed back by the Fed. 


NOW, about the two questions I get asked most often this week.


First.  I think a rational man (as opposed to a fan) has to see and think that Alabama should be favored in Saturday’s game.  If for no other reason than because Alabama has had better quarterback play and better offensive line play.  Both teams have really good defenses, the defenses are about equal.  Same with special teams.  Clearly if you’ve watched these team play you would have to say that Alabama’s offense has been more consistent than LSU’s offense.  And the one thing we know about Nick Saban is that he is the master at taking away what his opponent does best.  So he is going to scheme to stop LSU’s running game.  His corners are going to man up, and there will be 8 men in the box, or 7 with a safety shallow in run support.  In order for LSU to win Zach Mettenberger and the wide receivers will have to play better.  Much better.  LSU will have to be more efficient, more disciplined, less turnovers, less penalties.  I am a big believer in probability theory and the idea of reversion to the mean.  That leads me to believe that the greater probability is that Alabama plays to its mean and the somewhat lesser probability is that LSU plays above its mean, but it is certainly possible.  It happens all the time in the SEC.  It’s why you play the game.  Look, these are 20 year old kids playing a game.  Hell, one of them wakes up with a zit on his forehead and his psyche could be destroyed for the day.  So we play the game hoping Alabama has more zits.  Geaux Tigers!


Second, there is an election Tuesday.  I can’t help but think that the economic numbers and the Sandy weather (apparently you can’t call it a hurricane) helps the incumbent right before the election.      



John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury


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