The yield on the two-year note fell to its lowest level since 1992 following Tuesday's confidence report. At 3.58 percent currently, the yield is the lowest since the Treasury started selling the notes in 1972.
To send yields plunging to all-time lows, investors must be convinced that confidence leads economic activity.
Hardly. Asha Bangalore, an economist at Northern Trust Corp, looked at the correlation between the Index of Coincident Indicators, a gauge of current activity, and consumer confidence.
"The highest correlation between the two variables -- 71 percent -- occurs with the consumer-confidence index leading the Coincident Index by three months," Bangalore says.
"I never remember seeing something in the confidence numbers that we didn't understand," says J.P. Morgan's Glassman. "There aren't any mysterious drifts. Consumers react to income, job security and the stock market. The markets are looking at jobless claims every week." Consumer confidence is often a feedback loop, Glassman says, with consumers reflecting the spin in the news, which, in turn, reflects things like consumer behavior.
The same thing may be happening with the yield levels. In order to justify them, traders and investors need validation in each new piece of questionably relevant information.
The 2.5 percent increase in real consumer spending in an otherwise anemic second quarter challenges the bond market's reaction to consumer confidence this week. It may just be that the yield levels need justification -- and anything will suffice.
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