Bad news triggers a rally in the bond market

Posted Jul 3rd 2009 2:00PM by Connie Madon
Filed under: Bad News, Market Matters, Recession

Unlike the stock market, the bond market thrives on "bad" news. Why is this? The main reason is the money trail. Investors are quick to move their money from stocks into bonds when something bad happens.

Yesterday we had plenty of bad news. The U.S. job market lost 467,000 jobs, a 26-year high. Now to add fuel to the fire, wages are dropping due to layoffs and shortened work weeks (WSJ subscription required). Fewer people are working, which means less money that consumers have to spend. That signals a slower economy.

We should note here that the Treasury has scheduled $136 billion dollars in notes, bills, and bonds for next week. Nevertheless, The thirst for Treasuries overshadowed this heavy supply. The yield on the 10-year note fell to 3.494% from 3.54% on Friday. The 30-year bond was up 14.32% to yield 4.317%.

California is deadlocked over a budget resolution. To help ease the financial stress, California will pay 3.75% on 3.2 billion of 3-month notes. Just to show you how your credit worthiness affects yield, 3-month Treasury bills are yielding 0.162%. California is paying 3.5 times that much. Just for kicks figure out how much 3.5% is on $3.2 billion for three months. That's the California premium. Then we have the question as to whether banks will accept these notes from customers.

Would you buy the 3-month California notes?

Tags: bond market, California, inthenews, Treasury bills, unemployment