High yield is a nice way of saying "junk" when talking about bonds. These bonds are issued by firms who must pay a higher interest rate when raising capital than those companies that issue bonds that qualify as investment grade. Those higher interest rates are attractive to investors and lately demand for high yield bonds has led to a very nice rally in junk bond funds like the iShares High Yield Corporate Bond Fund (HYG).

Today, HYG is finally pausing in its uptrend as investors take some profits off the table across the bond market. Investors are concerned about the fact that the Treasury plans to flood the $112 billion worth of new debt into the market next week. That will be a record auction amount and could put temporary downward pressure on bond prices.

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.

What is the Philadelphia Federal Reserve index? First we should say that the Philly Fed Index, as it is called, measures business activity for the Mid-Atlantic region. During the recent financial crisis, the index has been solidly in the minus column with a reading of -22.6 in May and a median forecast of -17.0. Minus readings indicate a contraction in business activity, while plus readings indicate that business activity is picking up.

Surprise! The most recent reading came in at -2.2. While this is still a minus reading, its a big jump from the consensus reading of the median -17.0. This means that, while business activity is still weak, it is picking up at a more rapid pace than analysts had expected.

Investor Jim Rogers, noted for his expertise in commodities, is someone Wall Street professionals, business executives, and economists alike pay close attention to, as he's frequently been ahead-of-the-curve regarding market and investment trends.

Still, that's not to say that Rogers sometimes can't overdo it a bit and/or does not get it wrong.

A recent chat Rogers had with Bloomberg News is an example of the latter, as the talk yielded more rhetoric, half-truths, and flat out absurd statements and not a whole not of illumination.

You might say that a key investor, one of the exemplars, is no longer bullish on the pure bulls. Or on the unregulated bulls. Or on the totally free market bulls.

Billionaire investor George Soros told Bloomberg News that the current global financial crisis originated during the deregulation of the 1980s, and signals the end of the free market model that has dominated capitalist countries, and indeed much of the developed world, since the the end of the Cold War with the break-up of the Soviet Union in 1991.

U.S. policy makers are putting all hands on deck. All engines are being used to pull this train out of the station. In this case, nearly every cliché applies.

The Federal Reserve Bank of New York announced Monday it has started buying mortgage backed securities (MBS), as part of its $500 billion program to improve credit market liquidity and jump-start the housing market.

The Fed said it began buying MBS guaranteed by Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and Ginnie Mae. Purchase amounts will be published on the Fed's web site beginning January 8 and will be updated each Thursday.

Goldman Sachs Asset Management (NYSE: GS), Pacific Investment Management Co., and Wellington Management Co. will manage the $500 billion in MBS the Fed expects to purchase by June.

Global credit markets have recovered and stabilized following a brush with a global financial meltdown in September, but those markets have not normalized and a tough stretch of road remains ahead, so says an economist.

"We are on 'a great, long, slow journey' to use a Chinese saying," economist David H. Wang told BloggingStocks. "We have to be prepared for more bumps in the road ahead in 2009. We must be both proactive and also take corrective action in the credit markets."

Short-term interests have fallen considerably in the past three months, with the London rate for three-month loans in dollars (LIBOR) declining Friday to 1.50% from 4.82% earlier this fall, Bloomberg News reported, primarily on the strength of $8.4 trillion in liquidity-oriented interventions by the U.S. Federal Reserve and the other, major central banks.

The LIBOR is particularly important because it determines rates for $360 trillion of financial products worldwide, from home loans to derivatives.

Central banks: on the watch for credit stress signs

What could represent one of those 'bumps,' i.e. a re-igniting of short-term rates, in Wang's view? Another wave of home mortgage foreclosures, which would lead to another batch of toxic-bonds, write-offs, and financial institution stress, he said. The aforementioned "underscores the urgency of the Obama Administration and Congress passing a major home mortgage refinance plan for preventable foreclosures," Wang said. "If we stem the rise in mortgage foreclosures, we will make progress on the road leading to economic recovery."

How'd you like to borrow money for 30 years at 2.95%?

The U.S. government can, and it's making it easier for the federal government to fund its increasing budget deficit, as well as help build the case for a large fiscal stimulus package.

Treasury prices continued to rise Tuesday, pushing the yield on the 30-year government bond down to 2.95% -- close to its lowest level since regular sales began in 1977. The 10-year note yielded 2.48%; the 5-year note, 1.47%.

Further, while it may seem like a contradiction to have long-term interest rates fall at a time the U.S. government is on-track to record at least a record $600 billion (and probably much higher) budget deficit this fiscal year, there's a method to institutional investors' madness, so says economist Richard Felson.

"The landscape for private investment is poor. We have a recession on all continents, and there's a lack of places to deploy capital productively. That dearth of opportunities for return on investment plus fear of losses from toxic assets is driving investors to the safer investments, and one of the safest is the U.S. Treasury," Felson said. "It's the preferred place to be until the major economies start to recover."

In another sign that the credit crunch has not disappeared, the Port Authority of New York and New Jersey received no bids from investment banks to underwrite a taxable note offering.

The Port Authority was trying to sell $300 million worth of three-year notes, backed by revenue streams, Bloomberg News reported. The Port Authority operates airports, river crossings, and certain transit systems in the New York metropolitan area and has a strong credit rating. The agency is also rebuilding the World Trade Center site, including the new Freedom Tower.

Economist David H. Wang was apoplectic about the failed offering. "This is unbelievable," Wang said. "It's a ridiculous situation, frankly, and something has to be done to free-up these credit markets. This is the financial equivalent of Warren Buffett not being able to get a $20 million loan."

State, cities, and other taxing districts have had trouble selling bonds through advertised bidding, after institutional investors pared-back their appetite for fixed-income securities -- and just about every other asset class -- as the financial crisis intensified in September. In tandem, investment banks have balked at bidding for certain debt, sensing insufficient client demand, Wang said.

To look at it optimistically, it's a period of risk aversion.

Economists, business executives, analysts, and certainly employees are hoping it doesn't become an 'era of risk aversion' - - a longer period where businesses shun expansions and new projects, and investors avoid stocks.

Further, the risk-aversion theme is prompting investors large and small to flock to the 10-year U.S. Treasuries bond, also called 10-year notes, the yield for which was 3.05% on Friday at mid-day. (Bond prices move in the opposite direction of yield. Hence, when demand is strong, such as now, a rise in bond prices pushes their yield lower.)

Moreover the 10-year yield is likely to fall further in the next two quarters, as more investors flock to safe investments amid the U.S. recession, so says economist Richard Felson.

"We're seeing the value of safety come to the forefront. In this climate, investors don't care about yield, their primary concern is capital preservation," Felson said. "And despite the increase in debt the United States is likely to record over the next two years, the lowest risk investment remains U.S. Treasury notes. It's quickly becoming a sort of electronic mattress, the way savers used to store money in mattresses decades ago. Investors are saying, 'Here, take my money and store it until conditions improve.' "

Once again, Dow 8,000 has come back into focus.

For those investors who may not follow indices closely, the 8,000 level has a psychological but not technical support, the latter of which measures such things as the number of investors who are buying / selling, whether investors are committing more money to the market etc.

Even so, right now, a battle is taking place between the bulls and the bears: the bears argue the worst economic news stemming from the financial crisis is yet to come; the bulls argue that the worst news is behind us, and that government stimulus, fiscal and monetary, will get the U.S. economy moving again.

The Dow Jones Industrial Average Wednesday closed below 8,000 at 7,997. If the bears can keep the Dow below 8,000 and then push it through 7,800, then 7,600, it will not be a pleasant time for investors.

Let's do a condensed, cross-methodology analysis to see if we can arrive at an informed investment decision / conclusion regarding where the Dow is headed, near-term.

Yet another milestone has been reached in the ever-evolving global economy: China has passed Japan to become the largest foreign owner of U.S. Treasuries, the U.S. Treasury Department announced Tuesday.

China added $43.6 billion in U.S. Treasuries in September to about $585 billion in U.S. government debt, ahead of Japan's $573 billion.

Economist David H. Wang says the increased demand for U.S. Treasuries reflects both a global trend and an effort on China's part to increase high-rated bond holdings.

"In general, of course, during the financial crisis we've seen a global flight-to-safety by institutional investors, which has increased demand for U.S. government bonds," Wang said. "Also, China has made it known that it will be adding to existing U.S. bond positions, and the September data is further confirmation of this investment stance."

That global demand, led by China, has enabled the United States to have perhaps the most unique of all possible financing circumstances: moderate interest rates to finance its debt despite rapidly increasing borrowing to pay for the U.S. bank rescue and related financial stabilization programs, Wang said. For example, despite record government borrowing, the yield on the 10-year U.S. Treasury note is lower today, at 3.68%, than it was in August, 3.88%.

China's decision to spend about $586 billion or 4 trillion yuan in fiscal stimulus is likely to increase international commercial activity and global GDP, economists generally agree, but there may be a downside for the United States.

"There is the potential that U.S. interest rates could rise," economist David H. Wang told BloggingStocks Tuesday.

Wang said a key variable in U.S. interest movement will be whether China will need to repatriate capital deployed in the U.S. for investment back home in China.

"Right now, the initial models suggest investment pools in China will be sufficient to meet the additional capital that will be needed for the increase in public works projects," Wang said. However, Wang added that only five of his economic models have been completed in his study of investment flows, and five other scenarios with different assumptions still have to be run.

"Assuming what we know about U.S., European, Chinese and other economic growth rates for the first half of 2009, we should only see a slight increase in U.S. interest rates," Wang said. "On the other hand, China may seek to repatriate some U.S. investments as a safety mechanism of 'just in case things go worse than we plan.' "

Policy makers and bank officials are hoping it's just a Monday 'pause that refreshes.'

Short-term interests notched a mixed day on Monday, as the London rate for three-month loans in dollars declined for the 24th consecutive day, dropping another 6 basis points to 2.24%.

However, the three-month rate is still 124 basis points above the U.S. Federal Reserve's target interest rate. Further, the five-year average for the three month rate is 22 basis points. In addition, the overnight rate, or LIBOR, rose 2 basis points to 0.35%.

Also, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, fell another 6 basis points to 170 basis points, which is down from 387 basis points on October 10.

However, the TED spread was 87 basis points before the Lehman Brothers bankruptcy, and the current rate is still 159 basis points above the 11-basis-point, five-year average.

More progress on the credit market front.

The London rate for three-month loans in dollars declined for the 20th consecutive day, dropping another 10 basis points to 2.29%. However, the three-month rate is still 129 basis points above the U.S. Federal Reserve's target interest rate. Further, the five-year average for the three month rate is 22 basis points.

Also, the difference between what banks and the U.S. Treasury pay to borrow dollars for three months, the TED spread, fell another 9 basis points to 174 basis points, which is down from 383 basis points on October 10.

However, the TED spread was 87 basis points before the Lehman Brothers bankruptcy, and the current rate is still 163 basis points above the 11-basis-point, five-year average.

Economist Peter Dawson said credit markets have notched another good week. "It was another week of progress, with rates consistently heading lower, but more work remains," Dawson said. "Bank confidence is increasing, but it's not where it should be. More must be done by governments to remove toxic assets from banks and from the financial system to encourage more banks to lend."