Bond investor would be wise to pick up a copy of Shakespeare's MacBeth because, indeed, something wicked this way comes. The economy.
In what has all the makings of a tragedy for the Treasury market, the U.S. economy has entered onto a higher growth plane and investors are heading for the hills. Indeed -- from the point of view of fixed-income investors -- something is rotten in the bond market.
"Suddenly the economy is cooking and gaining more steam," said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, Inc. in Chicago. "Employment, durable goods orders, sales and housing are all doing better and the bond market has stood up and taken notice."
The Treasury's 30-year bond ended last Wednesday's session marginally higher, to yield 6.30%.
The economic fundamentals continue to bear the mark of recovery, and the market doesn't like it. Pervasive signs of growth have Put fixed-income investors on the defensive in recent weeks and thrown the spotlight on every stitch of economic news -- even reports that historically have held little significance for Treasuries, observers say. The market therefore remains extremely vulnerable to hints of strength.
Inflation has yet to pose a significant threat, but observers believe the potential is there. The great debt market rally of 1993 was predicated on the belief that the overall inflation rate was moving lower. But in recent weeks, upward pressures in some inflation indicators have dealt a sobering blow to the bond market and supported the notion that inflation remains low, but not dead.
For the first time in months, dealers are seeing long-term accounts liquidating long positions. And for the first time in weeks, the market is taking the recent downdraft in prices seriously, instead of discounting it as a consolidation.
The vast majority of market observers are predicting gross domestic product growth of 4% or higher in the fourth quarter of 1994, due mostly to inventory rebuilding. The U.S. bond market has sold off sharply in recent weeks as more and more economists jumped on the fourth-quarter bandwagon and Treasury yields backed up their highest levels in more than three months.
But as the dust clears and the market attempts to digest the economy's new-found buoyance, analysts are decidedly mixed on the long-term direction of the economy and interest rates.
Some observers -- like Charles Lieberman, director of financial markets research at Chemical Securities -- believe that the economy has built up significant momentum and that GDP growth will continue to come in at 3.5% or better next year.
Most, however, believe that the current acceleration in economic activity will be short-lived and that growth will stall in the first and second quarters of 1994. Observers point to a number of factors that will tend to hinder any pickup in economic growth next year.
According to Donald Fine, chief market analyst at Chase Securities Inc., those factors include uncertainty over upcoming health care reform and higher taxes, ongoing corporate restructuring, the scale-back in the defense industry, the weak commercial real estate market, and the lack of new and innovative consumer products.
This week, market analysts will rummage through a mountain of economic statistics for clues about where the economy is headed and retail investors will decide whether or not to close their books for the year.
The key focus will be Friday's employment report, which will provide market participants with their first comprehensive view of the economy's performance in November. Economists polled by The Bond Buyer generally expect an increase of 180,000 non-farm payroll jobs.
Other releases of consequence include November consumer confidence, the November National Association of Purchasing Managers' survey, and the first revision to third quarter gross domestic product growth.
"It's a busy week for data and it should give us an idea how the economy is doing," said Mary Dennis, economist at Merrill Lynch Government Securities Inc.