Streetwise/Barron’s

 | MONDAY, MARCH 29, 2010

Why Rising Yields Are Good -- for a While

By MICHAEL SANTOLI | MORE ARTICLES BY AUTHOR(S)

Bonds are unlikely to steal investor bucks from stocks.

SUNLIGHT, CASHEWS, TEQUILA -- SOME THINGS are very good until too much of them turns them bad.

One of the most chatted-about market drivers of the moment is like that: rising Treasury-bond yields.

The jump in the 10-year Treasury yield to 3.9% Thursday prompted, among other things, a front-page Wall Street Journal article; claims that bonds would soon compete for investor dollars with stocks; and the airing of fears that the world was finally choking on overabundant U.S. government debt.

Huge Treasury supply is a definite, and ongoing, concern. But at least part of the weakened appetite for Treasuries is a matter of the fading of those stubborn fears of a "double-dip" in the economy. Investors ought not to wish for the economic conditions that would cause rates to fall from today's levels, let's remember. In fact, the stock market seems to "want" incrementally higher rates if they come for the favored reasons -- firmer economic activity and waning risk aversion.

And Treasury yields collapsed from the 4% level now just overhead, as the credit crisis intensified in mid-2008, implying that something like "normal" markets should be expected to have yields in this range. Obviously, there is a yield -- and a pace at which it gets there -- where this trend would morph to bad from good. It's hard to know what that is in advance, but it's likely a good bit above 4%.

The concern about bonds "competing" for investor dollars is, at minimum, premature, and perhaps even a non sequitur. Investors have been gorging on bonds for a couple of years with absolute yields near generational lows. They seem not to be so finely tuned to the absolute amount of income bonds offer as to their own fear and greed, and the comfort of buying the thing that has looked most attractive in the rear-view mirror.

THE TONE AND CADENCE OF THE market is probably as hard to predict as its direction. And, indeed, the consensus view coming into 2010 among both bulls and bears that volatility would go higher has been exactly wrong.

Still, there are a few more reasons than usual to think that the coming week could see some jukes and shimmies due to mechanical and calendar influences, as we enter one of those times when the market decides to dance even if most of us can't hear the music.

First come month- and quarter-end, which all else being equal tend to be slightly bullish forces but can generate unanticipated noise. Then there's the fact that in much of the country it's a school-vacation week, with participation thinned by vacationing parent-traders.

And then we have the quirk of Friday's March employment-data release entering a near-trading vacuum. The stock markets in the U.S. and most of Europe will be closed for Good Friday. The U.S. bond market will be open to respond to what is now expected to be the first substantial net increase in jobs since the recession (probably) ended. So, maybe keep at least one eye on the screen this week?