Treasury Bonds Are the News

Top Line: The stock market moved higher in line with our thoughts and should continue going higher.

[Editor's note: Reminder that there will be no post tomorrow. The next post will be on Sunday evening for your reading pleasure on Monday morning.]

After the last few days of the swine flu scare the market was tired of waiting to rally and it jumped out of the gates this morning. After moving up about 2%, the market tread water for a few hours waiting for the Fed's announcement. When that Non-Event occurred the market went up about another per cent but then spent the rest of the day going back down. The final tally put the Dow up about 2% with a little up tick right during the last few minutes. All in all a strong performance. The major indexes all moved to bullish new highs for the move.

Meanwhile, over in the Treasury bond market, the yield on the 30 year bond closed above 4%. That's the first time the long bond has been over 4% since last November. As we keep saying, the long bond traded down near 2.5% late in December so the big December bond rally has come and gone. There is most likely quite a long ways to go from here. We expect rates to move up quickly to 4.5% on the long bond and maybe get up to 6% later this year. We think the bond rally that started in the early 1980's ended at the end of December and rates are now in a secular uptrend that will eventually get them over 10%.

The news before the market opened included a sharply worse GDP result than was expected. The annualized rate was negative 6.1% on expectations of negative 4.7%. Tonight we need to spend a little time discussing the GDP and interest rates generally.

First, the GDP number sounds bad but it looks bad because of the price deflator which came in at a high 2.9%. So, the economy contracted And inflation was higher. This is not a good combination. Second, this inflation number has the potential to push up interest rates as we have been mentioning recently, such as we did back a couple of paragraphs.