Friday, March 26, 2010
After this week's bloodbath in the bond market, lots of commentators are saying this is the beginning a major rise in interest rates.
Perhaps, but I still am not convinced. I still think that the combination of low inflation, sluggish growth, and accomodative Fed policy will keep rates low for at least a few years.
I think that bonds got smacked this week for a few reasons, none of which are necessarily sustainable:
1. Several Treasury auctions this week were poorly received. Whether this was because investors just wanted higher yields, or wanted to buy stocks, is not clear;
2. The "long Treasurys/short corporate debt" swap clearly worked against several large hedge funds. In advance of quarter-end, they needed to unwind the trades, adding to supply pressures;
3. The US government is about to take up the matter of whether the Chinese government is manipulating the value of the yuan (i.e., keeping it artificially low in order to make Chinese exports more attractive). The Chinese naturally do not agree with the US position, and may have been sending a message to the US (since they are our largest creditors).
Still, there is no doubt that a 25 basis point rise in interest rates in just a week (on 10 year Treasury notes) is a little unnerving to bond bulls like me.
And then there are the comments by former Fed Chairman Greenspan, summarized in today's Bloomberg.
Greenspan Calls Rise in Treasury Yields ‘Canary in the Mine’ - Bloomberg.com