Short view By Philip Coggan - Financial Times
Short view By Philip Coggan
Published: April 19 2006 03:00 | Last updated: April 19 2006 03:00. Copyright by The Financial Times
The surge in the oil price past $70 a barrel has put higher energy prices firmly back on the economic agenda. So far, oil has been the dog that did not bark, with higher prices not having the effect on demand seen at previous peaks.
Indeed, oil's high price is seen in part as a reflection of the same economic strength that is pushing many other commodity prices to record highs. That may help explain why oil has lost the link with bond markets seen earlier in this decade, when higher crude prices were positive for bonds because of the perceived effect on demand.
But some very complex forces are at work in bond markets. First, there is the potential impact of Japanese monetary policy. According to Jeffrey Rosenberg of Bank of America: "Over the next three months, $200bn worth of liquidity will be withdrawn from Japanese banks." Some of this money may previously have been going into US Treasury bonds. And with Japanese 10-year yields recently touching 2 per cent, there is more incentive for Japanese investors to keep their money at home.
Then, there is the question of whether higher commodity prices indicate a surge in inflationary pressures. Even if they do not, central banks may want to push interest rates higher as an insurance policy. That alone will keep upward pressure on bond yields.
Finally, there is the geopolitical tension, which seems to be responsible for the latest jump in crude. The markets have two fears: that Iran's nuclear ambitions will lead to US military action, or that an attempt to impose limited sanctions on Iran will lead Tehran to disrupt supplies.
The first possibility has been around since George W. Bush was re-elected. But with the Iraq war unpopular, it seems unlikely he will take such a big risk ahead of November's Congressional elections.
Predicting the Iranian regime's actions is harder. So far, it seems to have managed to translate the nuclear programme into a patriotic rallying point. But for bond investors, the key concern must be that the Iran crisis has not translated into "safe haven" buying of US Treasury bonds. Gold and the Swiss franc have been the biggest beneficiaries.
Published: April 19 2006 03:00 | Last updated: April 19 2006 03:00. Copyright by The Financial Times
The surge in the oil price past $70 a barrel has put higher energy prices firmly back on the economic agenda. So far, oil has been the dog that did not bark, with higher prices not having the effect on demand seen at previous peaks.
Indeed, oil's high price is seen in part as a reflection of the same economic strength that is pushing many other commodity prices to record highs. That may help explain why oil has lost the link with bond markets seen earlier in this decade, when higher crude prices were positive for bonds because of the perceived effect on demand.
But some very complex forces are at work in bond markets. First, there is the potential impact of Japanese monetary policy. According to Jeffrey Rosenberg of Bank of America: "Over the next three months, $200bn worth of liquidity will be withdrawn from Japanese banks." Some of this money may previously have been going into US Treasury bonds. And with Japanese 10-year yields recently touching 2 per cent, there is more incentive for Japanese investors to keep their money at home.
Then, there is the question of whether higher commodity prices indicate a surge in inflationary pressures. Even if they do not, central banks may want to push interest rates higher as an insurance policy. That alone will keep upward pressure on bond yields.
Finally, there is the geopolitical tension, which seems to be responsible for the latest jump in crude. The markets have two fears: that Iran's nuclear ambitions will lead to US military action, or that an attempt to impose limited sanctions on Iran will lead Tehran to disrupt supplies.
The first possibility has been around since George W. Bush was re-elected. But with the Iraq war unpopular, it seems unlikely he will take such a big risk ahead of November's Congressional elections.
Predicting the Iranian regime's actions is harder. So far, it seems to have managed to translate the nuclear programme into a patriotic rallying point. But for bond investors, the key concern must be that the Iran crisis has not translated into "safe haven" buying of US Treasury bonds. Gold and the Swiss franc have been the biggest beneficiaries.
posted by Carlos T Mock at 7:40 PM
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