January 21, 2008 |
|Government bonds down slightly as investors ponder viability of the White House stimulus plan.|
Treasury prices closed mixed Friday as investors expressed doubts about a White House plan to stimulate the ailing economy through $145 billion in tax relief.
President Bush, acknowledging the risk of recession, proposed tax incentives for business investment and individuals and said Congress and the administration need to settle on something as soon as possible to "keep our economy growing and create jobs."
The president said that to be effective an economic stimulus package would need to roughly represent 1 percent of the gross domestic product - the value of all U.S. goods and services and the best measure of the country's economic standing.
Investors overall are hoping a combination of economic stimulus and rate cuts can pull the economy back from the edge of recession. Yet Bush's plan did not rouse market sentiment because of uncertainty how the proposal will play out.
"What stood out in President Bush's statement on the economy was that there were no Democrats present in the room; only those in his inner circle," said Tony Crescenzi, fixed-income analyst at Miller Tabak.
"This was expected, but it reminds us to be leery of the prospect for fiscal stimulus until it becomes clear that a consensus is emerging on the details of any fiscal stimulus package."
The benchmark 10-year Treasury fell 2/32 to 105 2/32 with a yield of 3.63 percent, matching its late Thursday level.
The 30-year long bond dropped 11/32 to 111 29/32 with a yield of 4.28 percent, up from 4.26 percent late Thursday. Prices and rates move in opposite directions.
The 2-year note rose 3/32 to 101 22/32 with a yield of 2.35 percent, down from 2.41 percent late Thursday.
The yield on the 3-month note fell sharply to 2.85 percent from 3.07 percent late Thursday as the discount rate dropped to 2.79 percent from 3.00 percent.
The decline in short-term rates, which are the most interest-rate sensitive, are a sign that investors expect the Federal Reserve to reduce the overnight Federal funds rate charges to commercial banks soon. Investors often push market rates lower to pressure central banks into cutting official rates.
Bush: Economy needs 'shot in arm'
Bond market investors Friday monitored the travails of municipal bond insurers. Insurer Ambac Financial Group (ABK) called off plans to raise $1 billion in capital, a move that was until recently considered essential for the bond insurer to maintain its "AAA" financial strength rating.
The development caused credit rating agency Fitch Ratings to downgrade Ambac to "AA" from "AAA." The downgrade may force the company to stop writing new insurance.
T.J. Marta, fixed income analyst at RBC Capital Markets, said the downgrade in turn will trigger downgrades of the local governments that insured their bonds with Ambac and likely slow down municipal issuance going forward.
The municipal bond market is worth about $2.3 billion, according to the Securities Industry and Financial Markets Association, with roughly half those bonds backed by "monoline" insurers like Ambac.
On Friday the Conference Board reported that its index of leading indicators fell 0.2 percent to 136.5 last month - its lowest reading in more than two years - after declining 0.4 percent to a revised 136.8 in November and 0.7 percent to 137.3 in October.
The result marked the third consecutive monthly decline for the index and signaled that the U.S. economy likely will weaken further in coming months. Ken Goldstein, labor economist at the Conference Board, said in a statement that "the latest data suggest that growth could remain slow - and possibly be even a little slower - in the first half of 2008."
Some economists believe that the credit crisis and troubled housing market already have thrown the U.S. economy into recession.