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Markets & Stocks
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All about bonds
The Treasury market's decline is beginning to weigh on the stock market.
August 3, 2003: 9:11 AM EDT
By Justin Lahart, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Maybe all you'll need to do to figure out where stocks are going in the week ahead is follow the bouncing bond.

It's come to the point where stock investors can no longer look so blithely on the Treasury market's decline as they did when it first began. It was one thing to say that the bonds' run was overdone, but the steepness of their fall has become downright disconcerting.

The 10-year's yield climb from 3.11 percent on June 13 to the current 4.4 percent is one of the fastest moves in recent memory. The speed of the move smells of panic, and rumors are swirling through the market every day -- somebody's portfolio is blowing up, goes the chatter, or Asian central banks are selling agency debt.

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A lot of talk on Wall Street focuses on how the rise in rates could damage the economy. Already the major boost that mortgage refinancing gave consumer spending looks like it's going away, for instance, and it's possible that higher borrowing costs could make things difficult for companies.

But Northern Trust chief U.S. economist Paul Kasriel isn't really worried about how the backup in yields might hurt the economy -- at least directly. He points out that, historically, a rise in long-term Treasury rates that isn't associated with the Federal Reserve taking overnight rates higher has not been a bad thing for the economy.

No, the real danger is that the stock market starts freaking out about what's happening in the bond market and heads south -- that worries over portfolio blowups, foreign selling and collateral damage start to get equity investors shaking.

"This is the sharpest selloff in bonds since 1987," said Kasriel. "And we do recall what happened in October of 1987."

Scared? Hang on a sec. Yes, the stock market has been an extremely frustrating place for the past several weeks, meeting failure each time it's made an attempt at new highs. But the thing hasn't fallen, either.

"You've had a crash in the bonds, and the bears still can't bring down stocks?" said Raymond James chief investment strategist Jeff Saut. "That's telling me that the market wants to go up."

Saut's guess is that that's exactly what's going to happen in the weeks to come, with stocks eventually registering new highs. That's going to create one last flurry of buying. Saut thinks that will be the time to sell because, in his view, the economy just won't be growing fast enough to justify the market's advance.

Key events in the week ahead

  • Economists surveyed by Briefing.com expect June factory orders, due out Monday, picked up by 1.5 percent, up from May's gain of 0.4 percent. Much of this report is old news by the time it comes out, but it does give economists one of their earliest reads on inventory levels.
  • Economists don't take the Institute for Supply Management's services index, slated for Tuesday, very seriously, saying that it is badly constructed and lacks enough history to be meaningful. Still, it's only major measure of the service economy we have, and the market often responds to it. The forecast calls for the index to come slip to 58 for July from 60.6 in June.
  • The big earnings report of the week will be Cisco, set to report after the close Tuesday. Analysts surveyed by First Call expect the company earned 15 cents in its latest quarter, up slightly from last year's 14 cents.
  • Thursday's productivity report is expected to show an increase of 2.2 percent in the second quarter, up from 1.9 percent in the first.
  • June wholesale inventories, out Thursday, are expected to come in flat versus May's 0.2 percent decline.
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