Treasury Market Heads Higher Still, Oil Prices Could Hold at $25-$30
DAVID HAFFENREFFER, CNN ANCHOR: Economist David Jones, our regular Friday visitor, is in Atlanta this morning. From there, he joins Christine Romans and me now with a look at a bunch of issues affecting the economy and the marketplace this week. And, David, I want to start off with the bond market. Yesterday, we did have quite a rally for the long bond, up a point and 10/32. This an indication to you of what?</s>DAVID JONES, AUBREY G. LANSTON: Well, actually the Treasury market is going its own way these days, mainly because of a huge contraction in supply, due to our good-news budget surpluses. And so you have to watch, in my view, the corporate bond yields. And over time, certainly over the 18 months, those have been headed higher as a reflection of what I talked about earlier on this show -- that is, very strong credit demands relative to credit supplies. So my view is, yes, the Treasury market is doing well, but it sort of is living in a world of its own.</s>CHRISTINE ROMANS, CNN CORRESPONDENT: Do you expect that split to continue? And what if we get some sort of surprise from the Fed? Then what happens to these Treasury yields?</s>JONES: Well, that's a very good question. There's very little liquidity. I've been in that market for a long time, and I'm just shocked at how little the liquidity exists in the market now as a result of this huge cutback in Treasury supply. I think even the Fed has moved away from the Treasury market as a benchmark indicator. And I would put my money on -- and in fact, we probably should show the index, the BAA corporate bond yield sort of representing an average, perhaps, of all the range of corporate risks in terms of borrowing costs. That's certainly the index I'm watching. And that yield has been, at least, trending higher. So I think it's a key moment in this market world. But in my view, the Treasury yields could go lower because of contracting supply. But, as I say, they're marching to their own drummer.</s>HAFFENREFFER: We are seeing oil prices this morning, Brent North Sea crude up by 46 cents, $25.09 the barrel. OPEC, of course, met for a couple days earlier this week and hammered out an agreement to open up the spigot a little bit. Wall Street seemed thoroughly unimpressed. What was your take on that?</s>JONES: I think Wall Street's exactly right. I think there's been a major switch here. Everyone thought we had OPEC over a barrel, literally and figuratively speaking. And I think OPEC has us over a barrel in terms of the U.S. and Europe and the rest of the world, which is using more and more energy -- the U.S. and all of our sports- utility vehicles and all the rest -- and OPEC is in a much stronger position now. And I think we're going find more of this effective limits on production relative to very strong demand. I think these oil prices are going to hold up here in this $25- to $30-a-barrel range, much to the surprise of many people.</s>ROMANS: So, David, what does that all mean then for the first quarter picture of the U.S. economy? With those kind of oil levels, what does it mean for inflation? We're heading into some really important numbers next week with the NAPM and the jobs report -- census hiring likely to skew that one. What do you see in terms of the first-quarter picture coming off of that spectacular fourth quarter of last year?</s>JONES: It's a good news-bad news story. The good news is oil- price increases have not yet spilled over into other prices, that so- called core- inflation area Chairman Greenspan likes to talk about. Those core prices are still well-behaved. The bad news is that I think everyone, including me and the Fed, are revising up our economic forecast. This economy is getting stronger, not weaker. And that's bad news for the Fed, because -- remember, the Fed wanted to get a smooth or soft landing this year, maybe bringing growth down to the 3.5 to 3.75 range from above 4 percent. It looks to me as though -- certainly I've revised my forecast up to the 4 to 4.25 percent range for this year -- no slowing at all. And if anything, the economy could be speeding up now. That's going to make life tougher for Chairman Greenspan, because the labor market's going to get tighter, which could mean, at some point in the future higher wage and price pressures. And that that trade deficit that Chairman Greenspan talks about a lot -- stronger domestic demand, higher imports and a bigger trade deficit -- would, may, at some point, become unsustainable are two of his problems. So my sense here is that, if anything, this economy's getting stronger, not weaker.</s>HAFFENREFFER: OK. David Jones, thanks for the insights. And also a thank you to Christine Romans this morning. Search CNN.com CNNSI.com CNNmoney.com The Web