The bond market was so void of activity last week "that you could package it in a small box and give it away, and no one would know the difference," according to one bond trader.
The reason for the inactivity is that an extra amount of confusion and uncertainty has permeated the market place. For one thing many observers feel that the market had become involved in the election. Aside from the closeness of the political race itself, the government has been releasing numbers that the Street has considered suspect.
Three numbers in particular seem to point out the fact that the administration has been doing an exemplary job with the economy. First, the producer price index which is used as a measure of inflation was expected to be up in September. But when car rebates were included for the first time, a negative number appeared.
Next, when the new private housing number was released, the inclusion of the federally subsidized figure lifted the final number to a level that was greater than expected.
Finally, the durable goods orders number was expected to be up 3 to 4 percent. When the 8.1 percent increase figure was released, the stock market moved up while the bond market fell over a point, because a healthy economy means greater credit demands and more borrowing via the fixed income route. But, it was later learned that a surge in defense spending in September helped push the durable goods number much higher than expected.
There was also an apparent change in market sentiment -- from bullish to bearish -- by Henry Kaufman, the widely followed economist of Salomon Brothers. On Tuesday after Columbus Day, Kaufman in addressing the Salomon Brothers sales force pointed out that he felt in the near term the bond markets could improve.
Two days later at a bond conference, Kaufman made several observations that seemed to contradict his earlier remarks. Kaufman noted that "yields of 10.50 to 11.50 percent on high-grade long-term taxable bonds are now considered low yields." He also said that "several fundamentals also suggest that double-digit interest rates for long-term taxable bonds are here to stay -- at least for the forseeable future."
The bond community picked these and other statements of Kaufman to indicate that he had now turned bearish about the market. The market promptly declined a point or so in price and set the tone for the market for the next few days.
In reality Kaufman was refering to some "new percepts of interest rates" over a longer time span and had not changed his near-term views. So with all the confusion, questionable numbers and uncertainty it is not surprising that the bond buyers seemed to go on strike.