10-year Treasury edges past S&P500 yield for first time in year

Investors, betting on a recovery, push bond yields higher, stock dividend yields lower.

Investors, betting on a recovery, push bond yields higher, stock dividend yields lower. (Click to enlarge.)

The recovery story is gaining the upper hand in the markets today, with stocks posting rallying hard in response to strong news on housing prices and big rallies overnight in global markets. Treasurys are taking it on the chin. As a result, for the first time in a year, the yield on the S&P500 has dipped below the yield on the 10-year Treasury.

The Case-Shiller index reported today that home prices jumped 10.9% in March, the biggest gain in seven years. Double-digit gains in hard-hit areas like Phoenix, Las Vegas, San Francisco and Detroit helped to propel stock prices

Time to pop the bubbly? You’re behind the game. On the Hampton’s, Long Island’s tony seaside getaway (think Great Gatsby), the $25,000 stuff has already been drained. You’ll have to wait for the next sky diving waiter to find another magnum.

Bloomberg screenshot via David Lutz of Stifel Nicolaus
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Credit markets signaling rough waters ahead

Barney Frank and Goldman Sachs to the rescue.

The Dow Jones Industrial Average and the S&P500 averted near disaster today all because those two wacky sidekicks of the financial world pulled a rabbit out of the hat.

The story goes that Goldman Sachs, the firm we love to hate, made a late-day comeback after Barney Frank said he’d snuff a provision killing derivatives trading at the nation’s banks in the new financial regulation bill. The Goldman rally helped the Dow to erase most of the 200+ plunge today; the S&P500 actually eked out a gain. Damn! You would think Greece, Korea, or rising jobless claims would at least get one of the major stock indexes on this side of the pond to break through critical support levels. I mean, the FTSE at least was able to drop through 5,000.

For the sake of the economy, I’d like to say that I’m relieved the market rallied back above 10,000 on the Dow — but I’m not. I was equally unimpressed when the index crossed the dix mille bournes back in October.

That’s because I prefer to keep a closer eye on the credit markets — especially when it comes to reading the tea leaves of the economy.

The credit markets are less cartoon-like than equities. But they are wicked. For the past month or so they have been heading into a slow-mo laughing fit: You thought the recovery would be smooth? Ho-o-Ho-o-Ha-a-a-a-h! The stock market should shrivel at the humiliation.

Some call the bond market denizens vigilantes — because they force everyone to think about rising deficits, higher taxes, growth, and inflation. Stocks have more individual “stories” attached: A great leader or product; a market niche or dominance. They can be long-running tales with apogees and deep valleys —  Apple or Worldcom. They inspire passions. Bond people are nerds. That’s how they get to be the leaders when its time for systemic upheaval. No one pays enough attention to their formulae and schemes. Interbank lending rates. Yawn. Credit default swaps. Where’s the remote, hon?  But credit people can be prescient story tellers. And here’s the story that I hear today :

Banks are becoming more suspicious of one another and are slowly jacking up the interest rates on the loans they extend to one another. Bloomberg reports that the London Interbank Offered Rate now stands at 0.536 percent, up from 0.510 percent, the highest since last July. Another key rate, called the Libor-OIS spread, is showing signs of strain in the banking system, edging up to 31.1 basis points from 28.4 basis points. After the Lehman bankruptcy, banks became so worried about the solvency of the entire system that the Libor-OIS spread jumped to 364 basis points, or 3.64%. (The spread measures the cost of 3-month Libor vs overnight swaps rates.)

Investors are seeking safety. Treasury securities are rallying hard as investors seek cover from the debt woes in Europe; the Korean imbroglio is just a bit more oil to the fire — not the thing itself.  The flight-to-safety didn’t happen overnight. It’s more than a month old (see chart below; click to enlarge). Indeed, Mike “Mish” Shedlock  says that this is a “solvency crisis” — not a liquidity crisis. The flash-crash of May 6 was a liquidity crisis in extremis. A solvency crisis can only be solved through a long-term economic recovery.

NB: Gold is hitting record highs as some doubt the safe-haven status of Treasurys as the US faces mounting debt and slow growth.

Yield curve flashing danger ahead

The junk bond market has turned tail as investors reconsider the “all is almost well” story. The Wall Street Journal (in an item so short I thought I was reading USA Today) reported that new offerings have slowed to $2.2 billion, a quarter of the weekly pace for March and April. Further, in the past month, yields on junk bonds have jumped by more than one third, rising 1.62 percentage points to 7.02 percentage points versus benchmark Treasurys. The Journal glumly notes: “That is the biggest reversal since the market began to climb back from its lows of December 2008, said Martin Fridson, of Fridson Investment Advisors.”

Mish notes on his blog that seven junk bond offerings have been scrapped. Ouch.

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The market tumbles and the bear dances (video)

The folks at StockTwits wonder if the bear hasn’t begun its dance in the stock market, which fell sharply after weekly jobless claims surged by 22,000 to 496,000; analysts had expected a jump of just 13,000. In honor of the moment, the prognosticators at the Twitter spinoff put out a link to this black bear doing the funk:

[youtubevid id=”6UeCRY1wciA”]

As for stocks  — it may be premature to call the start of a new bear market based on today’s jobless claims. Bondscoop warned that bad weather and President Day’s weekend would make a hash of the numbers. Still it bears needs watching: The four-week average has risen by 6,000.

$600 bln later, financial stocks finish in first place

NYSE

The NYSE

“Financial companies are the best performers in the Standard & Poor’s 500 Index this quarter, a ranking that has eluded them for more than a decade and a half.

The industry hasn’t finished in the top spot among the S&P 500’s 10 main groups since the third quarter of 1993, according to data compiled by Bloomberg. Every other group has been first at least one quarter in this decade.”

via S&P 500 Financials Eye First Top Finish Since ’93: Chart of Day – Bloomberg.com. (h/t Paul Kedrosky)

Uncle Sam must be so proud. And it only cost about $600 billion.

Image via Flickr

On Wall Street, the glass seems suddenly half full

Optimist Club in Dunnville, Ontario

The Optimist Club

Everyday I find myself looking for signs of a recovery in humdrum details like the weekend lines at the upscale eatery in my neighborhood or the endless flow of taxis racing across my busy block at rush hour. Few are empty and I silently cheer.

Apparently, stock market investors are no different. Since March 9, the S&P 500 has surged 20% — although it still managed to drop 10% in the first quarter. Tuesday the index tacked on another 1.7%. The explanation for these extraordinary gains is nearly identical in every news outlet: A handful of recent reports in housing and manufacturing “topped economists’ estimates, bolstering optimism that the worst of the recession is over.”( Bloomberg )

But the explanation could just as easily have been investors have simply decided the glass is no longer half empty but half full. Treasury has a recovery plan. The February economic data didn’t worsen.

But it would be equally true to say the data point to a long, hard slog ahead. Global output is expected to decline by as much as 2.75% in 2009, the Wall Street Journal reported on the eve of the G-20 economic summit. That’s the first global pullback since World War II. In our own backyard,  T/S contributor Austin Consindine writes a pretty alarming post about the trend in foreclosures. ADP Employer Services announced that March job losses in the private sector were a hefty 742,000, more than expected and the most since 2001. And then there’s that bankruptcy threat at GM and Chrysler, which could throw a real wrench into the manufacturing and employment numbers.

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