MarketWatch: July 12-16

The (brief) stock market rally had dominated trading in the earlier part of the week. However, investor interest in U.S. government bonds picked up again toward the end of the trading week with a refocus on safe haven effects and increased signs of U.S. economic weakness. As a result, yields on the benchmark 10-year Treasury bond dipped below 3 percent again and came close to lows for the past year. (Yield haves been below 3 percent a lot of the time since late June and now.) The 30-year government bond has performed similarly.

Increasing concern about the strength of the economy and signs that inflationary pressures remain extremely subdued (always the biggest plus for bonds) led investors to shift relative portfolio preferences from stocks to bonds by the end of the week. Economic news of note included disappointing second quarter profit announcements over the course of the week, a disappointing consumer sentiment report, and a low consumer inflation report.

The series of weak economic news confirmed the message put out by the Fed during the week through the release of the minutes from its late June meeting: many (although not all) Fed officials think that while forward momentum continues, the economy is slowing down and the risks may be on the downside. (See its recently released FOMC minutes--along these lines, Chairman Bernanke is expected to give his Semi-Annual Monetary Policy testimony to Congress next week.)

Concerns about the economic and fiscal outlook for the eurozone also continued to underpin trading, although the earlier near-panic has subsided. During the week, the so-called “bond vigilantes” (PIMCO, the largest private holder of bonds) announced that they had reduced their exposure to eurozone debt instruments and had increased their holdings of U.S. instruments (“the U.S. remains the flight-to-quality country in the world”).