Stock Bulls Celebrate Low Bond Yields; Visions of 'Goldilocks' Economy Drive Up Shares, but Some Say The Signs Point to Slow Growth
SOMETHING STRANGE HAS been going on in the bond market, and, so far at least, it has been great news for stocks.</br></br>As the Federal Reserve has continued to raise short-term interest rates, longer-term government-bond yields haven't followed suit. They have fallen back to levels that some experts didn't expect to see again in their lifetimes.</br></br>After declining for two months, the yield of the 10-year Treasury note was at a paltry 4.08% Friday, well below the 4.6% level at which it stood when the Fed started raising short-term rates a year ago. Prime lending rates, pegged to the Fed rates, are up. But fixed mortgage rates and some corporate borrowing rates, which are pegged to bond yields, are at or below year-ago levels.</br></br>For a few stock investors, this conundrum, as Fed Chairman Alan Greenspan has called it, is bad news, because it could presage a weak economy.</br></br>But the prevailing view in the stock market is one of celebration. Many stock investors believe falling bond yields are predicting some good news indeed: low inflation, moderate economic growth and an end soon to the Fed's rate increases. That kind of "Goldilocks" economy, not too hot or too cold, would be fine for stocks.