July 3, 2010 Outlook

Whereas long bonds have hardly changed, short bond yields have fallen somewhat from last week. This was during a week where stock indices fell, implying that it was a flight to safety among investors.

Stocks have lost momentum during a negative week. Bonds did better than stocks this past week, and over a longer period. In fact, stocks don’t look at all stable, and it’s hard to tell what might happen. Prices are low, which implies a good time to buy. At the same time, the next couple months may be a rough ride, while bonds are likely to provide better stability.

The difference between short and long bonds indicates that the likelihood of a recession is remote. In this environment, banks can borrow at low interest rates (think of what’s offered on a GIC or “high” interest savings account) and lend long, earning the difference. This is currently profitable, which encourages banks to lend more.

It’s interesting to note that the posted 5 year mortgage rate has dropped 0.10% from 5.99% to 5.89%. This comes at a time when most people expected interest rates to be rising, not falling. It does, however, make housing (marginally) more affordable.