Lenon’s main business news

Stocks ended a choppy session barely higher Wednesday, with the Dow and Nasdaq eking out fresh 2009 highs as investors mulled a stronger dollar and opted to play it cautious at the end of a tumultuous year.

The Dow Jones industrial average (INDU) added a few points, ending at the highest point since Oct. 1, 2008. The S&P 500 index (SPX) ended just above the unchanged line, closing just shy of 15-month highs hit two days ago.

The Nasdaq composite (COMP) added a few points, ending at the highest point since Oct. 3, 2008.

Stocks ended a volatile session modestly lower Tuesday, with the three major indexes breaking a six-session winning streak that had left the market at 15-month highs. That weakness spread into Wednesday’s session, the second-to-last trading day of the year.

A stronger U.S. dollar put some pressure on the market as well, dragging on commodity prices and stocks, and pulling down shares of companies that do a lot of business overseas and therefore benefit from a weaker dollar. After sliding for most of the year versus the euro and yen, the dollar has gained over the last few weeks as investors have bet that the economy is improving.

Trading volume has been low this week, with many market pros and individual investors on vacation. Lighter trading volume can cause increased volatility. All financial markets are closed Friday for the New Year’s Day holiday.

Year-to-date, the Dow has risen 20%, the S&P 500 has climbed almost 25% and the Nasdaq has gained 45%, as of Tuesday’s close. All three indexes have posted more substantial gains since falling to multi-year lows on March 9 amid the height of the financial crisis.

"I think the market seems to have ended the year on a slightly positive note, with many investors happy to lock in their profits and look ahead to the new year," said Michael Sheldon, chief market strategist at RDM Financial Group.

Any stock market gains accrued next year are expected to be a lot milder, analysts say, as the government stimulus fades at the same time the slow-growing economy struggles to create jobs. Meanwhile, the consumer spending environment is expected to stay weak, the dollar could firm up and the Federal Reserve is expected to begin raising interest rates in the second half of 2010.

Sheldon said that 2010 could end up looking something like 2004, which proved to be a leveling year after the massive gains of 2003. 2003’s gains followed a three-year bear market.

The S&P 500 rose 26% in 2003, seesawed for the first nine months of 2004 and then managed a big run in the last quarter, ending the year up around 9%.

Sheldon said it wouldn’t be surprising to see the market churn or even selloff a bit in the first half of the year but eventually move back up to end the year with gains of 10% to 15%.

Other analysts are concerned that a bigger selloff could take hold, particularly if economists have been overly-optimistic about the economy’s ability to recharge once the fiscal and monetary stimulus starts to fade out.

"Right now the sentiment in the stock market is at bullish levels that haven’t been seen since 2007," said Matt Havens, wealth advisor at Global Vision Advisors. In October 2007, the S&P 500 and Dow industrials closed at all-time highs and the Nasdaq composite at the highest point since 2000.

"The underlying strength of the economy is uncertain going into the next year and the longer stocks keep moving higher, the greater the potential for a significant pullback," Havens said.

Economy: The Chicago PMI, a regional read on manufacturing, rose to 60 in December from 56.1 previously. The improvement was a surprise, with economists surveyed by Briefing.com expecting it to drop to 55.1.

Financials: Troubled auto and mortgage financing firm GMAC Financial Services is expected to receive a third round of bailout funds, according to a published report. GMAC is expected to get an additional $3.8 billion on top of the $13.5 billion it has already received since Dec. 2008.

World markets: Asian markets mostly ended lower. In Europe, London’s FTSE 100 lost 0.7%, Germany’s DAX lost 0.9% and France’s CAC 40 lost 0.6%.

Commodities and the dollar: COMEX gold for February delivery fell $5.60 to settle at $1,092.50 an ounce. Gold closed at an all-time high of $1,218.30 an ounce earlier this month.

U.S. light crude oil for February delivery rose 41 cents to settle at $79.28 a barrel on the New York Mercantile Exchange.

Bonds: Treasury prices rose, lowering the yield on the 10-year note to 3.79% from 3.80% late Tuesday. Treasury prices and yields move in opposite directions.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by eight to seven on volume of 645 million shares. On the Nasdaq, advancers topped decliners seven to six on volume of 1.31 billion shares. 

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Japanese Trade Minister Masayuki Naoshima apologized for speaking about third-quarter GDP data to oil industry executives on Monday ahead of its official release.

“I’m sorry. I honestly didn’t know it was due to be released at 8:50 a.m. (2350 GMT) so I thought it would be OK to talk about it,” Naoshima told reporters.

“I apologize for causing trouble and I’ll be careful from now on.”

Naoshima added that he told the industry officials about the GDP figures because people were concerned about the state of the economy.

(Reporting by Tetsushi Kajimoto; Writing by Chris Gallagher; Editing by Rodney Joyce)

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U.S. department store operator Macy’s Inc forecast earnings for the fourth quarter, which includes the crucial holiday shopping season, far below Wall Street expectations on Wednesday, sending shares down 8.1 percent.

“The falls in same-store sales were less dramatic than they could have been, and there are consumers shopping,” said Leah Hartman, an analyst with CRT Capital Group. “Expectations might have gotten a little ahead of themselves.”

Macy’s is the first major U.S. department store chain to report financial results this week. The others include: JC Penney Co, Nordstrom Inc and Kohl’s Corp.

On a call to analysts, Chief Financial Officer Karen Hoguet warned that the economy made forecasts more challenging.

“There is more uncertainty than usual in the environment,” she said.

Macy’s forecast same-store sales, or sales at stores open at least a year, to fall between 1 percent and 2 percent in the fourth quarter.

It also said it expects fourth-quarter earnings of $1 to $1.05 per share. Wall Street analysts had expected earnings of $1.17 per share, according Thomson Reuters I/B/E/S.

The company did improve its outlook for full-year same-store sales, forecasting a decline of 5.4 percent to 5.7 percent, compared to an earlier forecast for a decline of 6 percent to 8 percent payday cash advances.

Analysts said Macy’s efforts to keep inventories lean resulted in fewer markdowns, better sales and improved gross margins. Macy’s gross margin rose to 40.2 percent from 39.5 percent a year earlier.

3RD QUARTER BEAT

In the third quarter, Macy’s net loss narrowed to $35 million, or 8 cents a share, from $44 million, or 10 cents a share, a year earlier. Excluding one-time items such as $33 million in restructuring costs, its loss was 3 cents a share.

Last year, the retailer restructured itself under its “My Macy’s” program, designed to help the chain focus on local tastes and reduce head office expenses and duplications. So far in 2009, the company has spent $205 million on its restructuring.

Macy’s said sales fell 3.9 percent to $5.28 billion in the third quarter.

Analysts, on average, had been expecting a loss of 7 cents per share and sales of $5.25 billion, according to Thomson Reuters I/B/E/S.

The Cincinnati-based chain said losses had narrowed on the strength of its Bloomingdale’s stores and online sales, which rose 21.1 percent during the quarter. 

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NBC Universal looks to be in play, with minority shareholder Vivendi considering shedding its stake and Comcast, and now undoubtedly others, kicking the tires.

As the news broke, I just happened to be getting through the new book — The Curse of the Mogul: What’s Wrong with the Worlds Leading Media Companies, written by a trio of industry experts who teach a class at Columbia Business School. Nothing like a real live case study.

Essentially, the authors argue lucidly that the cadre of media moguls who dominated headlines for much of the past two or three decades have been deal junkies chasing rivals out of misguided notions about how to achieve long-term success.

Among other things, the writers — one of whom, Jonathan Knee, is actually a media investment banker — argue that such attributes as deep pockets, strong brands, and talent are "sham sources of competitive advantage", and that four key "media myths" have colored the mogul world-view: growth at all costs, globalization, the idea that "content is king" and "the cult of convergence."

It’s hard to argue with these folks — another author, Bruce Greenwald, is a respected economist at Columbia — but I will quibble with the book’s numerical set up: that many of the biggest and best-known media stocks have seriously underperformed the market.

The quibble is mainly existential in nature, rather than financial: if you measure only surviving companies in industries that have had enormous amounts of consolidation and deal-making, it stands to reason that they would under-perform.

As the authors point out, most mergers across all industries have been shown in academic studies to destroy value rather than create it — but they argue that this has taken place more egregiously in media mogul-land, as evidenced by some $200 billion in writedowns this decade.

My counter-point is simply that some investors have done quite well by investing in media companies, particularly if they were sellers into mergers, and took cash or sold their shares in the combined company around the time of its sale.

To wit, if you were a CBS (CBS, Fortune 500) shareholder when it was merged into Viacom (VIA) or an AOL shareholder around the time it combined with Time Warner (TWX, Fortune 500) (owner of Fortune and CNNMoney) or a Polygram shareholder when it sold to Seagram you could have done nicely. Ditto Pixar to Walt Disney (DIS, Fortune 500), and, if its deal with Disney proceeds as planned, Marvel Entertainment — and so forth.

Again, this is an existential (and maybe slightly cynical) point. Keeping in mind the book’s line that "only careful selection of dates can make any of the individual media conglomerates look good," yesterday I arbitrarily charted 10-year performance for Time Warner, News Corp. (NWS, Fortune 500), Comcast (CMCSA, Fortune 500), and Disney — the biggest of the survivors — against the S&P 500. With the index down 18% during that period, Disney was up 17% and News was down 3%. Comcast was off 28% and Time Warner sank 73%. One supposes "The Mixed Bag of the Mogul" is not such a compelling title.

Getting back to NBC and, its suitor Comcast: As it turns out, Comcast is one of the heroes of the book, with its CEO Brian Roberts praised for his well-conceived and deftly-executed acquisition of the former AT&T cable systems.

NBC, of course, is subsidiary of a giant conglomerate whose CEO, Jeff Immelt, has said he is committed to keeping the media business and shrinking GE’s (GE, Fortune 500) dependence on finance — though that was at a time before GE’s sinking market cap was in danger of being eclipsed by Apple’s.

Vivendi looks to be the catalyst. If the French telecom and music company wants to shed its 20% stake in NBC U, it has a put to do so which it can exercise in a few weeks’ time; this means GE either has to put up between $4 and $7 billion to buy the stake or consider an IPO of NBC U, which may not be an appealing option given some of the challenges at the company’s broadcast and movie divisions. People familiar with the talks say that Comcast would end up with 51% of the private joint venture being contemplated, by putting in some cash and content assets.

The authors of Curse of the Mogul do have one big caveat in their praise of Comcast’s acquisition of AT&T: that Comcast overpaid. Comcast shares have fallen amid the deal reports, just as they did when the company bid unsuccessfully for Disney a few years back.

Analyst Vijay Jiyant at Barclays Capital said in a report this morning that based on media reports valuing NBC at around $32 billion in the deal, Comcast would be overpaying again. And of course all this attention could smoke out other potential bidders, perhaps DirecTV but probably not (as I and others have speculated in the past) Time Warner.

As the latest dance gets underway, all involved might heed one of the book’s many cautions: "you can want a thing too much, and media moguls frequently do." 

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Sales of existing U.S. homes probably climbed in August to the highest level in two years, another sign the real-estate collapse that triggered the global recession is abating, economists said before a report today.

Purchases rose 2.1 percent to a 5.35 million annual rate, according to the median forecast of 74 economists in a Bloomberg News survey. It would be the fifth consecutive gain, capping the longest stretch of increases since 2004.

Government tax credits for first-time buyers and foreclosure-induced price declines are helping the housing market recover from the worst slump since the Great Depression. Federal Reserve policy makers yesterday committed to keeping interest rates low to ensure the pickup in growth is sustained.

“The housing recovery is under way,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. “While the first-time homebuyer tax credit likely boosted sales, there has been a fundamental shift in home buying due to greater affordability and confidence.”

The National Association of Realtors’ report is due at 10 a.m. in Washington. Bloomberg survey estimates ranged from 5.1 million to 5.55 million after a 5.24 million rate in July. Resales reached a 4.49 million pace in January, their lowest level since comparable records began in 1999.

A report at 8:30 a.m. from the Labor Department is projected to show the number of Americans seeking jobless benefits rose last week to 550,000 from 545,000 a week earlier.

Leading Indicator

Purchases of existing homes, which make up more than 90 percent of the market, are tabulated when sales close and therefore reflect contracts signed a month or two earlier. Sales of newly built residences, which make up the rest, are considered a more leading indicator because they are counted when a contract is signed.

The Commerce Department may report tomorrow that purchases of new houses rose in August to the highest level in 12 months, according to a Bloomberg survey.

Fed policy makers yesterday maintained they will keep the benchmark lending rate near zero “for an extended period,” while noting that the economy and housing had strengthened. They also said they will slow central bank purchases of mortgage debt securities in order to extend the $1.45 trillion program through the first quarter of 2010 rather than completing it by the end of this year.

They extended the period to allow more time “to work out of the housing problems,” John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North, Carolina, said in a report to clients yesterday.

First-Time Buyers

The Obama administration’s $8,000 tax credit for first- time home buyers, which is due to expire at the end of November, combined with the plunge in prices as foreclosures climbed, have helped lift sales this year. The Realtors’ group and the National Association of Home Builders have lobbied to extend the credit on concern demand will wane after it lapses.

Treasury Secretary Timothy Geithner told reporters on Sept. 17 that the administration would take a “careful look” at extending the credit and called signs of stabilization in the U.S. housing market “very encouraging.”

Growing demand has prompted builders such as KB Home to get back to work. Housing starts rose to a nine-month high in August, the Commerce Department reported last week, indicating residential construction may soon add to growth after subtracting from gross domestic product since 2006.

Builder Shares

The Standard & Poor’s Homebuilder Supercomposite Index is up 32 percent so far this year, compared with a 17 percent gain for the broader S&P 500.

Prices, which most economists forecast would be the last component of the market to turn, have begun to improve. The Federal Housing Finance Agency’s home-price index for purchases was up 1.1 percent in the three months through July, the best performance since early 2006.

The recent increases may also be contributing to the rise in sales as buyers who had been waiting for prices to turn jump back into the market, economists said.

“We’re seeing a firming of prices in a number of markets, not all,” Eli Broad, founder of Los Angeles-based KB Home, said yesterday in an interview with Bloomberg Television. “I think we have bottomed out in many markets.”

KB Home on Sept. 16 announced it was resuming its building operations in the mid-Atlantic region, including the Washington, D.C., area.

Still, with unemployment forecast to reach 10 percent by the end of the year and record foreclosures adding to the 4.4 million houses on the market, any rebound in sales, construction or prices will take time to strengthen.

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Iceland expects to get its first International Monetary Fund review this month as an accord with the U.K. and the Netherlands on depositor claims reaches completion, allowing the island to tap its bailout funds.

“We are still optimistic and it’s technically possible that the first review of the IMF program will take place in September, although we’re cutting it pretty tight,” Finance Minister Steingrimur Sigfusson said in an interview in the capital Reykjavik yesterday.

Iceland’s dispute with the U.K. and the Netherlands has threatened to stall the continued disbursement of its IMF-led bailout. The failure of Landsbanki Islands hf last year left thousands of British and Dutch depositors wondering whether they’d lost their life savings and even prompted the U.K. to deploy anti-terror laws to freeze Icelandic assets until the country agreed to cover the so-called Icesave claims.

The island’s lawmakers have since demanded changes to the government’s accord with the U.K. and Dutch authorities. Iceland yesterday received its first response from the two countries, which showed they don’t accept a clause requesting renegotiation if the loan isn’t repaid by 2024, broadcaster RUV said.

The Atlantic island is relying on the $5.1 billion international loan, including $2.5 billion from the Nordic states of Sweden, Finland, Norway and Denmark, to avert default and a second collapse, Sigfusson has said. To date, Iceland has received $827 million in IMF funds.

Not OK With Delay

“This delay is clearly not something that we are OK with or the fact that the review is connected to the Icesave matter,” Sigfusson said. “However, the official position of the IMF is that as the Nordic loans are contingent on the resolution of the Icesave agreement, the board wants to wait until all the parts of the financing are in place, before the review takes place.”

If the IMF review, which was originally scheduled for February, doesn’t take place by Sept. 25, it will be delayed again until the second week of October, Sigfusson said. It will be clear today “or this weekend whether or not the fund’s board will be able to carry out the review before it’s last meeting in this month.”

The coalition government on June 6 agreed to take a 2.35 billion-pound ($3.83 billion) loan from the U.K. and 1.2 billion euros ($1.76 billion) from the Netherlands to cover the deposit guarantees. However, the government needed parliamentary ratification for a state guarantee, linked to the loans. After three debates in parliament the bill was approved with conditions, including linking payments to economic growth.

Krona Slump

The failure of Iceland’s biggest banks last year forced the government to impose capital restrictions to prevent a sell-off of the krona after the currency lost as much as 80 percent of its value against the euro on the offshore market. The controls have failed to prevent a 7.5 percent decline in the krona against the euro this year, making it the third-worst performer of the 26 emerging market currencies tracked by Bloomberg.

“I believe that the fundamentals of the economy justify a stronger krona than what we see now.” Sigfusson said. “We would like to see the krona’s value increase as we think it’s currently undervalued. I’m not saying that it should gain a lot of strength, but at least reach a realistic long-term value.”

The country’s central bank, which shares Europe’s highest benchmark interest rate with Serbia, on Aug. 13 left the key rate at 12 percent.

At Odds

The bank said last month it won’t lower rates further adding it can’t rule out higher rates if the krona comes under pressure as capital restrictions are scaled back. That policy is at odds with Sigfusson’s view. He says he wants lower borrowing costs to boost the domestic economy.

“It’s important to continue on the path of rate cuts and bringing down inflation,” he said. “The primary objective is to bring about stability. Even though the rate of the krona is low, it is stable.”

Sigfusson, chairman of the junior coalition partner, the Left Green Party, became finance minister at the beginning of this year after the island’s economic collapse led to the ousting of the government former Prime Minister Geir Haarde. His party rules together with Prime Minister Johanna Sigurdardottir’s Social Democrats.

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Troubled banking giant Citigroup is seeking to scale back the massive stake the government acquired in the company over the past year, according to reports published Tuesday.

Citing people familiar with the matter, the Wall Street Journal reported that Citigroup approached the Treasury Department last weekend to initiate talks over shrinking the government’s investment in the firm.

Bloomberg, citing other sources, reported that the government may begin to sell shares in Citigroup as soon as October, with the hopes of completing a sale over the next six to eight months.

Since the crisis took hold a year ago, the government has had to step in more than once to pull Citigroup (C, Fortune 500) back from the brink. During that time, Treasury injected $45 billion into the firm and also agreed to share losses on a sizeable chunk of the bank’s troubled assets.

Regulators recently converted a portion of the government’s preferred-share stake into common stock to help bolster the firm’s health. U.S. taxpayers, as a result, now own approximately 34% of Citigroup.

The government’s stake has weighed heavily on Citi and other firms that have received exceptional federal assistance, such as Bank of America (BAC, Fortune 500) and insurer AIG (AIG, Fortune 500).

Compensation packages for Citi’s highest-paid employees are now subject to scrutiny from the White House, which has prompted some of its top-performing employees to seek opportunities elsewhere.

Hoping to scale back the government’s stake and its role in the company’s day-to-day operations, Citigroup executives have been considering a multibillion-dollar stock sale, according to the Journal. As part of the offering, Citi would issue new company shares. In addition, the Treasury Department would sell a portion of its holdings, the paper said.

Citigroup declined to comment on the matter. The Treasury Department was not immediately available for comment. 

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South Korea’s manufacturers increased production at the fastest pace in four months in June, a sixth consecutive advance, amid signs global demand for the nation’s cars and electronics is picking up.

Factory production rose 5.7 percent from May, when it gained a revised 1.5 percent, the National Statistical Office said today in Gwacheon. That compared with a 2 percent median estimate in a survey of economists. From a year earlier, output fell 1.2 percent, the smallest drop in nine months.

A revival in overseas shipments and consumer spending helped Asia’s fourth-largest economy expand at the fastest pace in almost six years in the second quarter. Optimism about a rebound sent manufacturers’ confidence to a 14-month high and the Kospi share index is up 38 percent this year.

“Exports have been performing relatively well and demand at home helped overall production,” said Go You Sun, an economist at Daewoo Securities Co. in Seoul. “There aren’t strong signs that demand is back, but a gradual pickup is likely.”

Other regions are enjoying a rebound in output as well. Japan’s industrial production increased 2 cash loans in 1 hour.4 percent from May, the fourth monthly increase, capping the biggest quarterly gains since 1953, a government report released yesterday showed.

Samsung Electronics Co.’s quarterly profit rose to the highest in more than two years, exceeding analysts’ estimates, fueled by higher sales of televisions and mobile phones. Hyundai Motor Co., South Korea’s largest automaker, reported record quarterly profit, with net income gaining 48 percent in the second quarter.

Government Forecast

South Korea may expand in the second half of 2009, the government said yesterday, adding that it is set to meet its 2009 economic forecast. The government said on June 25 gross domestic product will shrink 1.5 percent this year, less than an April forecast of a 2 percent contraction.

A leading index of economic indicators, which provides a gauge of future business activity, climbed 6 percent in June from last year, the report showed today. Sales of consumer goods rose 1.8 percent from May, while inventories gained 0.4 percent from May.

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Bond investors across the country are snapping up 10-year Treasury notes as expectations for a U.S. economic recovery this year disappear.

Firms from New York-based BlackRock Inc. to Franklin Templeton Investments in San Mateo, California, are turning more bullish a month after yields on Treasuries rose to the highest since October. Declining consumer confidence, falling stocks and unemployment climbing toward 10 percent has overcome concern that record auctions of government debt will overwhelm demand. Barclays Plc estimates $1.1 trillion more sales by the end of the year, on top of the first half’s $963 billion.

The gap between yields on 10-year Treasury notes and two- year securities narrowed to 2.40 percentage points from a record 2.81 percentage points on June 5 as investors took advantage of relatively cheap longer-term debt. The so-called yield curve typically widens when investors anticipate a recovery because they demand more compensation for the risk that growth will spark inflation.

“You are starting to hear more concerns about how well the economy is doing,” said Michael Materasso, co-chairman of the fixed-income policy committee at Franklin Templeton, which oversees $128 billion in bonds.

Franklin reduced its holdings of corporate bonds that perform better than government debt in an expanding economy and added Treasuries due in about 10 years in the past two weeks, Materasso said.

Bid-to-Cover

The yield on the benchmark 10-year note fell 20 basis points, or 0.2 percentage point, last week to 3.30 percent in New York, according to BGCantor Market Data, as an auction of $19 billion of the securities drew the most demand ever. The 3.125 percent note due May 2019 rose 1 20/32, or $16.25 per $1,000 face amount, to 98 16/32. The yield was little changed today as of 12:19 p.m. in Tokyo.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.28 on July 8, up from 2.62 at the last auction of the notes on June 10 and above the average of 2.38 at the previous 10 sales.

Stock markets also show growing concern about a recovery. The Standard & Poor’s 500 Index fell in each of the past four weeks, declining 7 percent to 879.13.

Materasso, who is based in New York, expects the yield curve to narrow to 2 percentage points. An investor buying $100 million of 10-year notes betting on a so-called flattening will earn $4.89 million if the gap narrows to 2 percentage points, according to data compiled by Bloomberg. That assumes that the two-year note yield remains constant at 0.90 percent.

Curve Forecast

Based on the median of at least 55 estimates in Bloomberg surveys of two- and 10-year yields, the curve will shrink to 2.35 percentage points by 2010. A month ago, the median was 2.48 percentage points, while in May it was 2.15 percentage points.

Before this year, the curve peaked at 2.74 percentage points in August 2003, as economic growth surged to 7.5 percent that quarter.

So far in July, 10-year notes have returned 2 percent, the first positive month since March, when the Federal Reserve said it would buy as much as $300 billion in Treasuries to drive down borrowing costs and spur the economy, according to a Merrill Lynch & Co. index.

Yields on Treasuries rose last month to the highest relative to German bunds of similar maturity since 2007 and exceed the rate of inflation by the most since 1994.

Rising Debt Sales

Investors anticipating yields to fall from June to September, as they have in 15 of the last 20 years, may be disappointed as the Treasury accelerates debt sales to finance a budget deficit the Congressional Budget Office projects will quadruple to $1.85 trillion in the fiscal year ending Sept. 30.

The yield curve steepened in the first half as 10-year notes lost 8.7 percent and two-year securities gained 0.12 percent amid concern U.S. debt sales would push up borrowing rates as the worst recession in 50 years came to an end. The U.S. more than doubled issuance in the first half. Sales for the rest of the year would be more than the total in all of 2008, based on the estimates by London-based Barclays, one of the 17 primary dealers required to bid at Treasury auctions.

“Where do I find the going away demand to choke down four times the amount of supply in the marketplace than what they had to deal with last year?” said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer at Grand Rapids, Michigan-based Fifth Third Asset Management paydayloans. “It’s a tough one.”

Fed Outlook

The Fed’s announcement June 24 that it anticipates keeping the target rate for overnight loans between banks at zero to 0.25 percent for an extended period is keeping two-year notes anchored near current levels.

Ten-year yields climbed to 4 percent on June 11 for the first time since October as investors raised concerns about President Barack Obama’s attempts to revive the economy with deficit spending. They also began to anticipate a recovery after Fed Chairman Ben S. Bernanke said in March that he saw “green shoots” in credit markets that would lead to a recovery.

The Libor-OIS spread, which measures banks’ willingness to lend, narrowed to 31 basis points, from a record 364 basis points in October.

Investors are piling back into Treasuries after consumer confidence declined in July following four months of gains. The government reported that the jobless rate rose in June to 9.5 percent from 9.4 percent the previous month.

‘Fundamental Headwinds’

“The economy still faces pretty fundamental headwinds from the employment situation and the inflation picture,” said Stuart Spodek, co-head of U.S. bonds in New York at BlackRock, which manages $474 billion in debt.

The S&P 500’s drop followed gains of as much as 40 percent since March. Investors are growing more concerned that prices outpaced prospects for a recovery from the longest slump in corporate profits on record.

Investors demand 10.89 percentage points more in yield to own high-yield, or junk, bonds rather than government debt, up from this year’s low of 10.4 percentage points June 15, Merrill Lynch & Co. indexes show.

Doubts the economy will recover this year are showing up in the currency market, where the yen appreciated to 128.95 per euro from this year’s low of 139.22 on June 5. The yen typically strengthens when investors unwind investments in higher-yielding assets financed with yen.

‘Classic Indicators’

“Classic indicators of risk aversion such as euro-yen have continued to show strong hints of rising,” William O’ Donnell, head of Treasury strategy at RBS Securities Inc. in Stamford, Connecticut, wrote in a note to clients July 10. “There’s every indication that investors are questioning the strength of the green shoots rebellion hatched this spring.”

Investors have also become more bullish on longer-maturity debt after the Fed tempered inflation expectations at its June policy meeting.

“Substantial resource slack is likely to dampen cost pressures,” the Federal Open Market Committee said in a statement after meeting June 24. “Inflation will remain subdued for some time.”

The gap between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook for consumer prices, narrowed to 1.51 percentage points today, the least since May 14, from a nine-month high of 2.13 percentage points June 10.

“As commodity prices continue to come off and TIPS breakevens continue to come off, you should see some of that risk premium taken out of 10-year yields,” said Todd White, who oversees government debt trading in Minneapolis at RiverSource Investments in Minneapolis, which manages $86 billion of bonds.

Relative Bargain

Treasuries are a bargain compared with European debt and inflation. Yields on 10-year notes rose last month to 28 basis points more than bunds, the highest since October 2007. As recently as December, Treasuries yielded 28 basis points less than bunds.

The cost of living in the U.S. fell the last 12 months by the most in six decades, the Labor Department said June 17. The government will report the measure on July 15. Prices rose 0.6 percent in June, according to a Bloomberg survey of 16 economists.

Yields on 10-year notes exceeded the consumer price index for the trailing 12 months by 5.25 percentage points, the most since November 1994, when the gap was 5.38 percentage points.

“The trend is for no V-shaped recovery and subdued global growth and therefore no inflation,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “I’m betting the curve will flatten again.”

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Rx: Health reform.

Warning: Headaches may result from trying to figure out what’s going to come out of the debate on Capitol Hill.

The proposals under consideration are incomplete. But the rhetoric is rich. So if you’re having a hard time making sense of it all, we hope this will help.

Here are 5 common concerns about overhauling the health care system and what we know … so far.

• Would a public plan hurt private insurers?
• Would a public plan kill employer coverage?
• How much would health reform really cost?
• Can we afford not to do health reform?
• Would reform improve my health care?

Would a public plan hurt private insurers?

President Obama and Democratic leaders have proposed setting up a national insurance exchange. The exchange would serve as a supermarket of plans and let consumers comparison shop for the policy that best suits their needs.

The majority of Americans are insured through their employers’ plans. Several reform proposals under consideration would impose a "pay or play" requirement on many businesses.

Much will depend on how a "pay or play" mandate is set up instant payday loans.

"If the cost of paying [into the exchange] is high enough, employers are more likely to play," Williams said. Conversely, if it’s low enough, it may make more financial sense to drop coverage and send employees to the exchange to pick their own plan.

How much would health reform really cost?

Preliminary estimates have placed the cost in the $1 trillion range. But that’s based on estimates of discrete portions of proposals. The real estimated cost of reform will depend on how all portions of the final plan are expected to interact with each other.

There’s a lot of disagreement over how to reform health care. But there is agreement that something must be done to curb the growth rate in health care costs.

Hard to say.

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