Wednesday, August 25, 2010

Hard-nosed Fed sends global markets reeling - Telegraph

Good post from Ambrose Evans-Pritchard in the London Telegraph yesterday.

Every commentator, it seems, is claiming that US bonds are in "bubble", and that bond investors are being set up for a major shellacking. And yet, compared to the rest of the world, US interest rates are essentially in lock-step. Only the credit-stressed countries like Ireland and Greece are seeing high interest rates.

So either the entire world has gone mad (a possibility, I suppose) or the markets are rationally looking at the recent U.S. economic data and heading for the safety of government securities.

Here's an excerpt from the column:

Yields on 10-year bonds fell to 0.92pc in Japan and record lows of 2.23pc in Germany and 2.88pc in the UK. They hit 2.47pc in the US, a Depression level. Irish spreads ballooned to the highest since the launch of EMU. Greek spreads neared 900 basis points, as if the EU's €110bn bail-out never happened.

"This has been one of the most interesting days in finance ever," said Andrew Roberts, head of credit at RBS. "We are right at the tipping point. Yields are about to collapse even further, equities are about to turn over. The end game approaches, probably in next few weeks."

(Mr. Roberts of RBS seems to set a new standard from sangfroid: while he is convinced that the end game is near, he finds all of this "interesting".)

Hard-nosed Fed sends global markets reeling - Telegraph

The stock market recovered somewhat today, and yields actually rose slightly on US Treasurys. We are still following the Japan playbook: stock prices and bond yields are moving in the same direction.

That said, let's hope we're not going to follow the rest of the Japan experience; Mr. Evans-Pritchard continues:

For the Japanese this has become a nightmare. Their V-shaped rebound has been cut off short of its 2008 peak. Growth stalled to just 0.1pc in the second quarter. Unemployment has been rising for four months.

Yet it is their curse to have a currency that strengthens at the wrong time, pushing them deeper into deflation. The Japanese repatriate their foreign wealth in storms, driving up the yen. The dollar-yen rate hit ¥83.6 yesterday, prompting ever warnings from Toyko that intervention nears. Finance minister Yoshihiko Noda said the moves were "disorderly" and posed a threat to stability. "I am watching currencies with great interest," he said.

(Note that Noda-san agrees with the aforementioned Mr. Roberts that all of this is "interesting").

I don't think that we're necessary near the "end game" but we are obviously in a slow patch for the economy. The effects of the government stimulus for housing and durable goods is apparently wearing off, and there doesn't seem to enough demand right now to keep the recovery moving that began a year ago.