INFLATION IS DEAD, LONG LIVE BONDS!:

Bond market surprises analysts, ends low on high note: The economic recovery was supposed to put the damper on bonds' stellar run. But this year's bond market defied expectations. (RACHEL BECK, 12/30/04, Associated Press)

The bond market wasn't supposed to finish out the year this way. With the dollar slumping, the U.S. economy improving and the Federal Reserve taking action to keep growth in check, the good times were supposed to fizzle.

But that didn't happen. In fact, it turns out the yield on the 10-year Treasury note -- the benchmark for everything from mortgage rates to how much corporations have to pay to borrow money -- might close out 2004 lower than where it started.

Sure, that's higher than the near half-century lows that the yield dropped to more than a year and a half ago, but this market hasn't been performing over the last 12 months like anyone expected.

It's starting to sound a bit like a broken record when you talk about bonds. Over the last year or so, there have been forecasts predicting an imminent retreat leading to prices dropping and yields rising -- they move in opposite directions.

And at points along the way, it has looked like the pullback was beginning. Then the market would switch course.

This seesawing has surprised many market watchers, who believed it was inevitable that yields would surge as more bearish factors loomed over the bond market.

The bond market appears appears to have figured out deflation, even if few others have.

Posted by Orrin Judd at December 30, 2004 9:11 AM