While you were watching oil

Who isn’t attracted to a story like the rise of oil? It not only has great significance for investors, it also touches our daily lives in many ways. So let me start this column that is not about oil with a snapshot of what occurred in the oil market yesterday: crude oil for July delivery added $2.18 to $131.03. As much as everyone wanted to see continued downside selling, rebels in Nigeria continued to attack oil installations there.

While everyone was watching the oil market (note all of the jazzy new graphics announcing “America’s oil crisis”), an equally important milestone was reached yesterday. The 10-year US Treasury bond dropped in price and closed above 4% (4.01% actually) for the first time since the end of last year. Why should you care about the unsexy bond market? Because not only can the yield of bonds affect the cost of borrowing for individuals and companies, it is also an interesting indicator of where some investors believe the economy is headed.

Perhaps the most startling aspect of the slowdown/recession/credit crunch/energy crisis of 2007-08 is the lack of really bad economic news outside of housing. The data show the US economy is not doing as poorly as we all think or feel it is. That is attributable to a weak dollar, which has helped US exporters sizzle; a consumer who has not totally collapsed yet; and non-financial corporations whose balance sheets are squeaky-clean after the internet bubble burst and are still earning money.

Yesterday, the economic news that confounded economists and analysts was found in the durable goods report. The Commerce Department reported that orders fell 0.5% last month, compared to the consensus estimate of a 2% drop. The stronger-than-expected number was good news in that it shows some strength among businesses despite slow growth in the broader economy, but with strength comes the idea that maybe the Federal Reserve really is done with its rate cut campaign after all.

The reaction among the bond traders was to sell the 10-year Treasury. Because bond prices and yields are inversely related, when you hear that prices are dropping, that means that yields are rising. So if you own a bond fund, you will likely see a dip in its value from the peak reached in mid-March. My guess is that the move down in the Treasury market may impact the average portfolio at least as much as rising oil, but without the nifty graphics!