Short view By Philip Coggan - Financial Times
Short view By Philip Coggan
Published: May 3 2006 03:00 | Last updated: May 3 2006 03:00 Copyright by The Financial Times
Bond investors are having a difficult time. The economic data continue to move against them and the 10-year Treasury bond yield has risen to more than 5.1 per cent.
The global economy seems robust. Monday's rebound in the US purchasing managers' survey for the manufacturing sector was followed by similar pick-ups in the eurozone and UK surveys yesterday.
Indeed, so well is the global economy performing that Stephen Roach, the Morgan Stanley economist, has revised his famously gloomy views. He thinks "the odds are shifting away from a disruptive global rebalancing" of the US current account deficit.
It is tempting to see this as a "Tony Dye" moment, in which the capitulation of the last bear is a signal that economic catastrophe is really about to strike. (Dye was a dotcom sceptic who left fund managers Phillips & Drew weeks before the bubble burst.)
But it is more complex than that. Roach's fear was that the weight of the US deficit would cause the dollar to plunge and US bond yields to rise. In contrast, most pessimists expect that a US downturn would be good news for bond markets, prompting yields to fall.
That the US economy, in particular, will soon slow seems to be the view of the Federal Reserve; hence the US central bank's hints that interest rates are close to their peak. The Fed may want to keep rates on hold after its next meeting and wait for the slowdown to show up in the data. Strategists such as Mark Cliffe of ING believe that higher oil prices and the lagged impact of previous rate rises will indeed slow the US economy later in the year.
But what if the slowdown fails to occur? Tim Bond of Barclays Capital says the Fed approach involves high risks. "The obvious problem with waiting two or three quarters to see if growth slows in line with their forecast is that, if it does not slow, then inflation risks will be boosted by the cumulative impact of another two or three quarters of above trend growth."
Thus one reason why bond yields are pushing up could be that investors are contrasting dovish rhetoric from the Fed with soaring commodity prices and concluding that the risks of a policy mistake have increased.
Published: May 3 2006 03:00 | Last updated: May 3 2006 03:00 Copyright by The Financial Times
Bond investors are having a difficult time. The economic data continue to move against them and the 10-year Treasury bond yield has risen to more than 5.1 per cent.
The global economy seems robust. Monday's rebound in the US purchasing managers' survey for the manufacturing sector was followed by similar pick-ups in the eurozone and UK surveys yesterday.
Indeed, so well is the global economy performing that Stephen Roach, the Morgan Stanley economist, has revised his famously gloomy views. He thinks "the odds are shifting away from a disruptive global rebalancing" of the US current account deficit.
It is tempting to see this as a "Tony Dye" moment, in which the capitulation of the last bear is a signal that economic catastrophe is really about to strike. (Dye was a dotcom sceptic who left fund managers Phillips & Drew weeks before the bubble burst.)
But it is more complex than that. Roach's fear was that the weight of the US deficit would cause the dollar to plunge and US bond yields to rise. In contrast, most pessimists expect that a US downturn would be good news for bond markets, prompting yields to fall.
That the US economy, in particular, will soon slow seems to be the view of the Federal Reserve; hence the US central bank's hints that interest rates are close to their peak. The Fed may want to keep rates on hold after its next meeting and wait for the slowdown to show up in the data. Strategists such as Mark Cliffe of ING believe that higher oil prices and the lagged impact of previous rate rises will indeed slow the US economy later in the year.
But what if the slowdown fails to occur? Tim Bond of Barclays Capital says the Fed approach involves high risks. "The obvious problem with waiting two or three quarters to see if growth slows in line with their forecast is that, if it does not slow, then inflation risks will be boosted by the cumulative impact of another two or three quarters of above trend growth."
Thus one reason why bond yields are pushing up could be that investors are contrasting dovish rhetoric from the Fed with soaring commodity prices and concluding that the risks of a policy mistake have increased.
posted by Carlos T Mock at 10:01 AM
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