Where do Rates Rate?

Ho-hum Jobless Claims data. Initial Claims were up 2,000 from to 366,000 from a prior revised 364,000 (up from 361,000). The Street had expected 365,000 new claims. Initial Claims appear to be settling in to a range of 360,000 to 370,000. This would indicate monthly job growth in the low 100,000s. Continuing Claims came in at 3,305,000. This was down from a prior revised 3,336,000 (up from 3,332,000). The Street forecast was for 3,300,000 Continuing Claims. This does not include 2.36 million people (down 63,900) receiving Emergency extended benefits. Housing Starts declined more than expected in July, coming in at -1.1% versus a Street consensus of -0.5%. This was not surprising as Building Permits had declined 3.1% in June. Building Permits are a proxy for future Housing Starts. July Building Permits increased 6.8% versus a Street consensus of 1.2%. This should translate to healthy August Housing Starts data. Encouraging was that of the 812,000 new building permits, 513,000 were for single-family homes. Recent earnings report indicate that large home builders have seen an increase in demand. However, demand appears to be the province of the large home builders, rather than broadly-based demand. Increased new home demand is a double-edged sword. On one hand, increased demand for new home sales usually results in job creation at the construction and supplier level. On the other hand, it combats overall real estate price recovery. This helps to keep consumers constrained and, in many cases, underwater in their current home. It appears that the economy continues to recover slowly and will continue to do so, unless policymakers undermine the recovery for political purposes. Improved economic data has some fixed income market participants thinking that QE3 is not the "sure thing" they once believed (we thought it was questionable all along). This is thought by some to be the cause of the recent spike of long-term Treasury yields. Although this may have been the genesis of higher long-term rates, the move has been exacerbated by thin markets and a reduced flight to safety from Europe as the continent is "on holiday." Do you doubt our analysis of rising rates? Consider that fact that German bunds (the other safe haven investment) have also seen a spike in yields. The 10-year bund has seen its yield rise from a recent low of 1.16% on 7/22/12 to a recent high of 1.56%. yesterday. Although some of the rise is due to concerns that a largely German-funded bailout of Spain would put upward pressure on German rates (it would likely do so as more debt without matching revenues often equals higher rates), the fact that rates began to Spike the last week of July and continued into August, when many Europeans are away from their posts is not a coincidence. We would not be surprised if the trend for rising rates stalls or reverses in September. The end of QE could mean the end of long-term asset purchases, but it could also mean the end of inflation-inducing monetary policy. Remember, long-term rates spiked at the times of QE1 and QE2. For information regarding Bond Squad subscriptions; go to: www.bond-squad.com 347-927-7823 Twitter: @Bond_Squad Disclaimer: The opinions expressed in this publication are those of the author. They are not, nor should they be considered solicitations to purchase or sell securities.