Employment is stronger than expected. The dollar is weak. Prices are beginning to climb -- as the inflation indexes are expected to show today and tomorrow. In short, the bond market is headed for substantially higher interest rates.
This bearish view is totally different from the atmosphere in the credit markets last fall when bond yields were at their lowest levels in 20 years and appeared to be headed lower still. Then the fixed-income market changed direction without warning, and yields have been climbing ever since.
It's no wonder that the Clinton Administration's economists, who arescheduled to make a new economic forecast this week, have decided not to even try to predict what the bond market will do. They will simply take long-term interest rates as they are and say they will remain unchanged for the next year.
That conclusion, of course, is the only prediction that is certain to be incorrect. Whatever yields may do from now until July 1995, they will not remain stable, meekly lying there like a sleepy hound dog while currencies, commodities, and derivatives are crackling with activity. It ain't going to happen.
Washington and its big economic allies have recently made efforts to intervene in the foreign exchange markets and jawbone some strength back into the dollar, but it's pretty clearly known by now that these governmental efforts are futile. As long as the U.S. government continues to run annual budget and trade deficits over $100 billion in size, foreign exchange markets will overpower whatever intervention central banks can muster.
As long as American savings rates remain low and federal budget deficits remain high, foreign capital will be required to run the economy, and that means interest rates cannot remain low, certainly not if the economy keeps expanding and employment becomes stronger. That's the backdrop for municipal bond sales at midyear.
States, cities, and other local governments that need to finance long-term capital improvements (and that description applies to most of the country) face rising borrowing costs, and it makes sense to sell bonds now. Increased resistance from taxpayers, though, will prevent many states and cities from selling bonds before interest costs rise, and that's okay although often short-sighted.
The basic lesson here is that the country should be working harder to reduce its budget and trade deficits, but there's little evidence of action. So rates will rise.