Dark Side to an Improving Economic Outlook
In assessing the potential for a broader and more balanced investment recovery, improving investor sentiment is grease for the wheels. But evidence of modestly stronger economic and labor market outcomes has a range of consequences. Most recently, falling initial claims for unemployment insurance, a rebound in the Empire State Business Conditions index, and other metrics have supported just such a measured rise in sentiment. In turn, yields on long-dated Treasuries have adjusted in a muted variation on the standard relationship. As of last Friday, the 10-year yield had risen to 2.03 percent, up from 1.87 percent at the market’s closing bell for 2011. The magnitude of the increase is small and the absolute rate remains astonishingly low. Nevertheless, the increase corresponds with the worst starting performance for Treasuries since 2003. The asset misallocations that may pervade aspects of the market, even if only on the margin, are at risk of correcting as the adjustment progresses toward its logical conclusion.
