Stock Bulls Tumble, Bond Yields Rumble, Dollar Values Crumble

The stock market suffered a paddling today as investors came down to Earth after the hard up day on Friday. The blue chip index dropped about a quarter of a percent, while the NASDAQ fell four-fifths of a percent, putting it back into the long-term trading range in which it has languished for many months. Despite the good-news mainstream media treatment of last week's jobs numbers, stock investors see such reports as further evidence that the Federal Reserve will continue to push short-term interest rates upward, which will put downward pressure on economic activity.

Bond prices moved south across the board today, pushing yields up, especially on longer maturity instruments. Much of this erosion today was blamed on worries about two U.S. Treasury auctions later this week of government debt instruments. Rumors and expectations are rampant on the Street that the foreign investors who have routinely and for so long been the big lenders to the United States have had enough and will stay away from the auctions.

Dark Wraith CyberGloss

An investor who buys Treasury instruments is lending the U.S. government money. Buying a Treasury "bill" is short-term lending; buying a Treasury "note" is intermediate-term lending; and buying a "bond" is long-term lending.

  This will cause the prices of the newly issued Treasurys to sink on the slack demand, and this will cause the yields on those bonds to move upward until they get high enough to attract lenders. Recent Treasury auctions have seen less and less foreign interest in U.S. debt instruments, meaning that the government must bear higher and higher yields to sell the paper. Bond prices lost ground today as investors sold off their positions before the expected price tumble resulting from the Treasury auctions.

Among the handful of reasons for the diminishing interest in U.S. debt among foreign sources of captital, many market participants point to two major, somewhat interrelated themes.

Dark Wraith CyberGloss

When the U.S. goverment cannot pay for its expenditures with the tax revenues it generates, it must borrow money. Much of this borrowing occurs through auctions of government IOUs that are called "Treasury securities" because it is the United States Treasury Department that oversees the issuance of these debt obligations.

  First, the government has borrowed so much money during the course of the Bush Administration that foreign investors are awash in Treasurys and simply want no more of them in their portfolios. Second, as a South Korean public official stated last week, other investment vehicles—among them, oil and euro-denominated securities—offer superior opportunities for making money over both the short and the long terms, despite the rising yields on American public debt instruments. And third, although rarely discussed by public officials, there seems to be an underlying sentiment building across the global markets that it's time to stop lending the United States government money to support its excessive spending and inadequate tax policies.

In other news today, the U.S. dollar lost ground against major world currencies, sliding closer to its all-time lows against both the yen and the euro. Despite rising interest rates in the United States, which should cause the dollar to strengthen, global currency traders have not been satisfied that U.S. interest rates are high enough or headed higher at a sufficient rate to merit buying greenbacks. This lack of demand for the American currency causes it to weaken against more popular, favored currencies backed by robust economies such as those of Japan and the nations of the European Union.

Dark Wraith CyberGloss

"Net exports" is the difference between total exports from the United States and total imports to the United States. A "trade deficit" means that total imports exceed total exports, and a "trade surplus" means that total exports exceed total imports.

  The weaker dollar is being tacitly favored by the Bush Administration because of the hoped-for result that American exports will become so cheap overseas that the currently staggering U.S. trade deficit will close with the increased export activity. This effect has, unfortunaely, not been seen so far; but the other side of that coin, rising prices of imports to the United States, has been evident to anyone paying the high prices for gasoline and home heating oil. Because the United States imports a large percentage of the oil it uses, the weakening dollar makes that oil become more and more expensive to buy in greenbacks. Many analysts are saying that the price of gasoline at the pump should average as much as $2.15 by this Spring, which will not just put a crimp in vacationers' travel plans, but also cause wide-ranging, adverse effects on American consumers, who will have less money in their pockets for other purchases after they've paid their gasoline and energy bills.