The Outlook for Bonds
The Treasury bond market could disappear in about eight years. That's the
implication of the federal government's latest surplus forecast. The
10-year surplus estimate is now some $4.2 trillion--a $1.3 trillion boost
over the previous prognostication by government economists. The Treasury is
currently making sizable debt pay downs, and federal debt as a share of the
economy is down from nearly 50% in the early 1990s to about 34% this year.
Little wonder Washington insiders, such as the Gore and Bush campaign
staffs, are reeling from the rapid transition to budget surpluses following
two-decades of fretting about budget deficits. Of course, it's doubtful
that the Treasury bond market will vanish. For one thing, it's highly
likely that a recession will rock the economy sometime over the next
decade. For another, at least some of the projected surplus will go toward
new tax cuts and spending programs.
Nevertheless, the bond market could
offer enticing returns for investors. The main reason is that the odds
favor inflation remaining tame. For instance, wages, core consumer prices,
and non-energy commodity prices never rose by much when the economy was
expanding at a 6%-plus pace. These inflation measures should improve
markedly now that the Federal Reserve Board's six rate hikes are moderating
the economy's growth rate. To be sure, the inflation-phobic central bank
warned that it is still wary of rising prices after deciding not to hike
rates on June 28th. But I think the Fed is done tightening.
The bottom line
is the same whether the Fed is done or another rate hike lurks in our
future: Inflation is going nowhere and bonds will
hold their value.
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