Swap-Yield Correlation
Even with the moves, two-year interest-rate swap spreads, a measure of stress in the financial system, ended last week little changed at about 42 basis points. That's more than 50 percent greater than its average this year.
The 120-day correlation between changes in the spread and the 10-year yield reached negative 0.5 this quarter, the highest since Greece sought a bailout in August 2010. Correlations of one mean assets move in lock stop, and negative one signal they move in the opposite direction. As recently as the first quarter, when Treasuries lost 0.14 percent, the correlation was zero.
"In the environment that we're in, which is fear of Europe, those fears are overwhelming any movement in the economy," Thomas Roth, a senior trader in New York at Mitsubishi UFJ Securities USA Inc., said in a Dec. 8 telephone interview.
Growth in the euro area economy will probably slow to 0.5 percent next year from 1.6 percent in 2011, while the U.S. likely will accelerate to 2.19 percent from 1.8 percent, according to Bloomberg surveys of economists.
After a July 29 Commerce Department report showed the economy expanded at a 0.4 percent pace from January to March and at a 1.3 percent rate in the following three months, slower than previously reported, the Fed took steps to spur growth.
Policy makers led by Chairman Ben S. Bernanke pledged on Aug. 9 that the central bank would hold its target rate for overnight loans between banks at about zero for at least the next two years and said Sept. 21 they would extend maturities of the Fed's Treasury holdings by purchasing $400 billion of long- term debt and selling an equal amount of shorter-term securities. That was after buying $2.3 trillion of government and mortgage securities from November 2008 through June 2011.
Manufacturers are now more optimistic about sales, spending and hiring for next year than service companies, a sign factories will remain at the forefront of the expansion, according to the Institute for Supply Management. Purchasing managers anticipate sales will grow 5.5 percent next year and capital investment will increase 1.9 percent, the semiannual forecast from the Tempe, Arizona-based group showed on Dec. 6.
Labor Department figures on Dec. 8 showed weekly jobless claims fell to the lowest level since February. A day later, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 67.7 for December, a six-month high, from 64.1 at the end of November.
Strategists forecasting falling yields are in the minority. The median estimates of 64 economists surveyed by Bloomberg is for 10-year rates to rise to 2.19 percent next quarter, 2.35 percent by the end of June, 2.5 percent in the third quarter and 2.6 percent a year from now.