Economy Rebounds Before Election, Treasuries Show (Update1)
By Daniel Kruger
Feb. 11 (Bloomberg) -- Before you can say ``Barack Obama is president of the United States,'' the economy will be growing faster again.
That forecast is based on the rise in the five-year Treasury yield from its lowest level relative to two- and 10- year notes since 2001. The last two times that happened was during the recessions of 1990 and 2001, and the economy began to expand within nine months.
``We're actually starting to see tell-tale signs by the market that it expects the economy to be in recovery in six to nine months,'' said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley. The five-year note ``tends to be the most forward-looking point on the curve,'' said Caron, whose firm is one of the 20 primary dealers of U.S. government securities that trade with the Federal Reserve.
If past is prologue, then the five-year note's yield indicates the economy will be on the mend by the Nov. 4 general election. Whoever wins the White House may have Fed Chairman Ben S. Bernanke to thank for cutting interest rates at the fastest pace in almost two decades and President George W. Bush and Congress for a proposed $168 billion stimulus package.
Obama, the junior senator from Illinois, and New York Senator Hillary Clinton each control about half the delegates needed for the Democratic Party's nomination. Arizona Senator John McCain is the front-runner among Republicans.
`Put in Place'
While the risk of a recession is now even, growth will accelerate to a 2.5 percent annual rate in the final three months of the year from 0.6 percent last quarter, according to the median forecast of 62 economists polled by Bloomberg News from Jan. 30 to Feb. 7.
``The economy in the second half will definitely get a boost from the fiscal plan'' and Fed rate cuts, said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock Inc., which manages $513 billion in debt. ``The pieces are being put in place.''
Spodek said he sold five-year notes in the first two weeks of January and bought two-year securities.
The yield on the benchmark 2 7/8 percent Treasury due in January 2013 fell 5 basis points, or 0.05 percentage point, to 2.69 percent last week, according to New York-based bond broker Cantor Fitzgerald LP. The price rose 7/32, or $2.19 per $1,000 face value, to 100 27/32. The benchmark two-year note's yield fell 13 basis points to 1.94 percent. Treasuries were little changed today.
What Caron bases his forecast on is the yield on the five- year note compared with the average of the two- and 10-year Treasury. Five-year yields dropped 16 basis points below the average on Jan. 22. The last time they were lower was January 2001, when the difference was 18 basis points. The U.S. was in a recession was from March to November 2001.
`Back to Normal'
In August 1990, five-year yields were 2 basis points below the average and rose to 36 basis points above by June 1991. There was a recession from July 1990 through March 1991.
To avert a recession, the Fed cut its target rate for overnight loans between banks twice this year, to 3 percent from 4.25 percent. Central bank officials are confident their actions will pull the economy out of its malaise. Dallas Fed President Richard Fisher said expansion is poised to resume in the second half of the year.
``We're going to go back to normal growth rates,'' he said Feb. 7 in a Bloomberg Television interview during a visit to Mexico City. ``We're going to have slower growth for a while, for a half-year.''
Service Slowdown
Yields on five-year notes have increased 14 basis points since the Fed first reduced rates this year on Jan. 22, while two-year note yields have fallen 6 basis points.
Hindering a recovery is the weakest labor market in more than seven years, a decline in services industries and a slowdown in consumer borrowing.
Employers shed 17,000 jobs in January, the first reduction since 2003, the Labor Department said Feb. 1. The Institute for Supply Management's non-manufacturing Index unexpectedly contracted in January at the fastest pace since the 2001, the Tempe, Arizona-based group said Feb. 5. Consumer debt rose at the slowest pace in eight months in December as borrowers cut back on credit-card use, the Fed reported Feb. 7.
Proposals by Obama and Clinton to revive the economy are similar. Both recommend allowing the Bush tax cuts to expire, extending unemployment insurance and reducing demand for foreign oil by building more environmentally sensitive energy sources.
Uninterrupted Growth
McCain favors making Bush's 2001 and 2003 tax cuts permanent. He also advocates a mix of spending reductions and lower taxes or reforms to boost growth.
As Bush leaves office, his departure may be ``analogous to the first President Bush,'' said Margaret Patel, who oversees $1.4 billion at Evergreen Investment Management Co. in Boston.
President George H.W. Bush, the current president's father, left in January 1993 with the economy at the beginning of almost 10 years of uninterrupted growth, she said.
``The economy may be stabilized and starting to do better,'' said Patel, who is avoiding Treasuries and buying high-yield debt of energy and basic-materials companies.