From Dwight Johnston of Wescorp.

Bonds are getting whacked this morning. (Well, something needed to get whacked after no one got whacked in last night’s Sopranos finale.) Friday’s bond rally from the early morning trade to 5.25% on the 10-year note is proving to me more of a short-covering rally than anything too meaningful. Virtually all weekend business journals and Wall Street economists’ reports are reporting the death of the bond market.

Before you bury the bond market, consider this. On June 13, 2006 the 10-year note yield was 4.90%. By June 26, 2006 the 10-year note hit 5.25%; a 35 basis point rise in just under two weeks. The combination of a hot economy in the early months of 2006 (led by strong housing starts) and rising inflation led all of the Wall Street to conclude that the Fed might raise rates beyond the expected 5.25%. Flash forward to 2007. Two weeks prior to Friday’s ascent to 5.25%, the 10-year closed at 4.88%; an increase of roughly 35 basis points.

For a few days in 2006 after the 10-year initially hit 5.25%, bond yields moved little but sentiment solidified that rates would in fact rise further. By September 1, 2006, the 10-year yield was 4.73%. Of course this doesn’t mean that pattern will be repeated this year. We have the equity merger mania to contend with this year that wasn’t a factor last year. But we do have even greater potential that the economic data will weaken further. Employment now is weaker than in 2006, the housing market is worse, credit problems are worse, and gas prices are higher.

Here is the full commentary.

-- By Chris Duncan

Posted in Economy