Market Analysis

The bond market continues to improve today as investors show relief that this week's $65 billion in US Treasury debt auctions ended on a positive note with very strong biddig for the government's 30 year bond yesterday.  Also, next week no long term US debt is scheduled to be auctioned which at least provides a one week reprieve from the onslaught of supply of new debt onto the market.

In other news, analysts are beginning to question the possibility of a jobless recovery and the impact of the possibility of high unemployment rates on the overall economy and more specifically on corporate profitiability.  This analysis could be positive or negaive on bonds.  To the extent that analysts questions the ability of the stock market to show continued gains that is typically good for bonds.  However, if investors begin to fear year upon year of increased government spending due to high unemployment rates on top of already increased government initiatives, then that could be bad for bonds.

Now that investors appear to be calmed that there will not be a total global financial meltdown, look for the focus of the news to shift quickly to what policy makers can do to decrease unemployment.  We must hope that one element in this discussion will be targeted on how to revive the housing sector which is a key driver for consumer spending and job growth.  What is not certain, however, is whether the Fed can continue to drive interest rates lower through their mortgage backed security program.  The focus for the Fed may shift to how to manage a smooth transition when they run out of the $1.25 trillion dedicated towards purchasing mortgage-backed securities from Fannie Mae and Freddie Mac.  They have spent approx $550 billion to date.  The Fed may elect to strech out their purchases so that there is more of a gradual shift when the program ends.  Currently the program is designed to conclude at the end of this year.  The Fed could decide to stretch that out for a longer period of time without increasing the size of the program by purchasing smaller amounts of securities each month.  To this end,  the Fed may actually prefer that mortgage rates not be in the 4's since at that level refinance activity is so large that most of the Fed's purchases are refinance loans rather than purchase transaction loans.