Equity investors look ahead
The early part of this past week was miserable for the equity markets. All of a sudden they seemed to realize that economic data would look rather negative for a while, perhaps through the end of the year. But real GDP turned out to be less negative than expected, and by Thursday equity investors were shaking off the current month's reports and looking ahead to 2002 when the U.S. was likely to be in sharp recovery. The turnaround in sentiment on Thursday and Friday was not enough to recuperate losses sustained earlier in the week, but it shifted the tone. Market players are not necessarily irrational in their thinking. Consider the monetary stimulus of the past year and the upcoming fiscal stimulus, which is sure to boost economic activity. Over the past five business cycles, stock prices have signaled the lead out of recession by an average of four months. If September marked the stock market trough, we could be seeing economic recovery come February.

Treasury suspends indefinitely 30-year bond
The biggest story this week focused on the Treasury's decision to suspend indefinitely the issuance of 30-year bonds. The Treasury first talked about this a couple of years ago. Yields on Treasury securities dropped sharply in 1999 and 2000 when the Treasury first noted that it would buy back 30-year bonds as well as issue fewer securities in general. After all, everyone was predicting large budget surpluses as far as the eye could see. But the bond market was startled by the Halloween announcement because recent events have dampened the surplus for fiscal year 2001 (it was almost half the size of the previous year's surplus). Moreover, the sluggish economy suggests that the surplus may even turn to deficit in FY2002.

In any case, since the Treasury will no longer issue 30-year bonds, the 10-year Treasury note becomes the de facto benchmark security. As a result, yields on both securities fell sharply during the week. Indeed, the entire spectrum of maturities saw a sharp drop in yields. Some bond investors believe that corporations stand to benefit, now able to offer 30-year bonds without competition from the Treasury.