Bond markets are taking it on the chin so far today as the risk-on trade suddenly reasserts itself. As I have said before, seasonals, technicals and supply are at play. The overall disinflation fundamentals remain a powerful tallwind and will win the day, rest assured. I was taken by the article on page B1 of todays WSJ showing how the discount stores are adding tremendous capacity as they seek to meet the demands of an ever increasing costconscious consumer - and in the meantime, cannibalizing their own businesses. Maybe we will soon be calling them half-dollar stores. Dollar General said last week that it is opening 635 new stores this year (!) to its base of around 11,000 shops. Dollar Tree is adding 200 to its stock of 4,400 and Family Dollar, which has more than 7,000 outlets, is adding 500 more after 200 openings last year.
This is not the consumer foundation for a resurrection of inflation. It is a prolonged post-bubble era of frugality. Higher taxation will only serve to heighten this trend. So for the bond market- please. Take a deep breath. It always sells off in the first quaner and it is largely seasonal in nature. The 10year T-note yield rose 34 basis points in the first quarter of 2010 and the yield went on to decline the rest of the year. In 2011 Q1, much the same with a l7bps increase in yield followed by a complete reversal the rest of the year. In the first quarter of 2010, when escape velocity and economic rejuvenation was all the rage, the 10-year yield was little better than range-bound and then in the next three quarters fell more than 50 basis points. Bill Murray in Groundhog Day could not possibly play this role any better.
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