U.S. economic reports have increasingly exceeded estimates – this usually translates into stronger stocks and weaker bonds – but not now – what gives? . . .

Bond rates remain near all-time lows despite persistent strength of U.S. economic indicators beating estimates.  Usually interest rates rise when the economy strengthens.  The following chart, courtesy of www.bondvigilantes.com , shows the usually tight relationship between U.S. Treasury bond yields and an index of the degree by which U.S. economic metrics exceed their estimates.  The fear of spreading Euro contagion has disrupted this relationship.  Flight capital out of the Euro has bid down U.S. Treasury rates.  The “bondvigilantes” point out that things in Europe will have to deteriorate even further in order for U.S. bonds to appreciate any more.  If the Europeans achieve some stability then we may see a flow out of Treasuries and into equities, an upward move in interest rates and a strong rally in stock prices in the U.S.  Jeb Terry, Sr. Dec 27, 2011

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