What Stocks May Need Is More Bond Buyers

It may be that what Wall Street really needs isn’t a fresh army of stock buyers, but a fresh army of bond buyers.

While stocks rallied Friday after plummeting over the prior week, the bond market was hit hard by the March employment data, which showed another healthy rise in average hourly wages.

With Federal Reserve Board Chairman Alan Greenspan having indicated long ago that the Fed is more paranoid about wage pressure than almost anything else--because an upward spiral in wages could, conceivably, fuel strong consumer demand and thus an upward spiral in prices for goods and services--Friday’s report seemed to cement the idea that the Fed will have to tighten credit further to try to slow the economy.

Thus, the quarter-point hike in short-term interest rates the Fed ordered March 25 is almost certain to be followed by another quarter-point hike, by May 20 if not sooner.

And as long as the Fed is raising rates, bond yields can be expected to rise--or at least they aren’t going to fall.

Hence, the yield on the bellwether 30-year Treasury bond jumped to 7.12% on Friday, up from 7.06% on Thursday and the highest since September.

Some bond pros argue that yields have already risen to levels that are fundamentally attractive. “I think bonds are overdue for a rally,” said Patrick Retzer, a fund manager at the Heartland mutual funds in Milwaukee.

But the bond market’s major problem in recent years is that long-term investors--especially among individual investors--have shied away from it, favoring stocks instead. That has left bonds at the mercy of short-term investors, argues James Bianco at Arbor Trading Group in Barrington, Ill.

If bonds can’t attract new investors soon, yields could go much higher, Bianco notes. And that may be the surest way to turn a modest “correction” in stocks into something far worse.