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FORGET THE NEAR-3% PLUNGE in stocks Friday or the 10-point collapse in consumer confidence in June. The important number to contemplate is 0.569%, the lowest yield ever attained by the two-year Treasury note.
Even though this is the most actively traded security on the planet, the two-year Treasury gets short shrift outside the inside-baseball world of bondos. That is undeserved, since the two-year note is an augury of future short-term interest rates. And its message is that money-market rates will remain depressed throughout its term.
What is extraordinary is that the two-year Treasury didn't reach its (thus far) nadir in late 2008, when financial Armageddon seemed at hand. It came last week, during the early days of the jolly time called earnings season, when—as in Lake Wobegon, where all children are above average—practically all earnings are "above expectations." Alcoa (ticker: AA), CSX (CSX) and Intel (INTC), among others, cleared the bar, which for many had been lowered to limbo height.
At the same time, the more intensely watched Treasury maturities—the benchmark 10-year note and the 30-year long bond—both fell back below their respective round numbers of 3% and 4%.
The irony is that, just a few weeks ago, the whole world was worried about an implosion of the economies of Europe. Those concerns seem to have exceeded the global markets' short attention spans. Maybe it was the victory in soccer's World Cup by Spain, the S in PIIGS. The G in the acronym, Greece, was able to sell its treasury bills.
Indeed, the euro has continued to recover while the dollar has been sliding across the board, notably against the Japanese yen. While the euro peeked above the $1.30 level for the first time since early May—a 9% rebound from the low of $1.19 in June—the dollar dropped to a seven-month low of 86.27 yen.
But the greenback's renewed slide—totaling some 6.8% since early June—doesn't point to increased inflation. Just the opposite. Gold plunged through the $1,200-an-ounce level Friday along with the stock market, although that was rumored to be related to liquidation by some hedge funds that had made big bets on the metal.
It may be that the more important cause for worry is the U.S. economy. Prices are declining, as indicated by the June readings on producer and consumer prices released last week, which isn't altogether a negative for consumers. But even as they watch out for falling prices, they show little inclination to spend or to borrow. Retail sales fell again in June, while consumer credit contracted sharply in May on top of a hugely downwardly revised April number released last week.
The notion that someone, somewhere is being granted a loan, while the stock of credit shrivels as creditworthy borrowers are being turned down, isn't sufficient to power the economy. This lack of credit growth, especially for small business, was the subject of a day-long Federal Reserve confab last week, which yielded few solutions.
Meanwhile, all signs point to continuing economic malaise, even if it doesn't qualify for the proverbial double dip, thanks to growth numbers having nominal plus signs ahead of them. The Fed lowered its projections for growth at last month's meeting of the policy-setting Open Market Committee. And the Economic Cycle Research Institute, whose leading indicator signaled the 2009 bounce, now is pointing to a sharp deceleration, if not an outright decline.
That's consistent with the two-year Treasury note's yield languishing at a record low in what supposedly is a recovery in growth. While profits have rebounded, consumers see something else, as Friday's University of Michigan data show (see Review).
Fed Chairman Ben Bernanke presumably will explain all this in his semiannual report to Congress this week, formerly known as the Humphrey-Hawkins testimony. His inquisitors should ask why investors accept the minuscule return of little more than a half-percent per annum for lending to the government for two years if all is well. Don't hold your breath.
E-mail: editors@barrons.com
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