Bond price riddle unravels the Greenspan conundrum
Bond price riddle unravels the Greenspan conundrum
By Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: June 13 2007 03:00 | Last updated: June 13 2007 03:00
When bond prices crash and yields go up, it is usually because of a classic inflation scare. Not this time.
The sharp rise in yields over the past few weeks - above all in the US - has been almost exclusively driven by a rise in the long-term real interest rate, with very little change in inflation compensation.
This begs the question of what is driving the rise in the real rate, whether it is likely to prove sustainable, and what it might have to do with changes in global economic imbalances.
Investors may have concerns about stronger global growth and a gradual ebbing of the disinflationary force of globalisation, but have confidence that the Federal Reserve and other central banks will rein in inflation.
In this case, underlying inflation concerns could be translated into an expectation of higher real rates over the long term, without any rise in inflation compensation. In practice, though, the lack of any noticeable rise in the inflation risk premium makes it hard to believe the rise in the real rate has been driven by inflation concerns.
Other explanations focus on the balance of desired saving and investment in an increasingly integrated global capital market.
In recent years - as Ben Bernanke, Fed chairman, has argued - a "global savings glut" outside the US has kept real interest rates low in the US and globally, pushing up the value of assets such as US property and encouraging US consumers to spend, not save.
The result has been a global low interest rate equilibrium, characterised by full employment in the US, strong global growth and large trade imbalances, including the $759bn US current account deficit.
Now some speculate that the global savings glut might be declining - and with it Alan Greenspan's famous conundrum, the failure of bond yields to rise in tandem with short-term policy rates.
"I think there is some unwinding of the conundrum here," says Peter Hooper, chief economist at Deutsche Bank securities.
One possibility is that traders may be repricing bonds in anticipation of a long-term decline in the savings rate in big emerging markets and oil exporters.
Mr Hooper says China's move to buy a stake in Blackstone, the private equity group, signalled that its reserve management policies "are shifting a bit". So far, though, the petrodollar and emerging market surpluses are undiminished; China's trade surplus is exploding upwards.
Others emphasise a rise in investment globally, with more competition for funds from non-US markets, including a strong eurozone.
"Investment - which was subdued - is beginning to pick up," says Raghuram Rajan, a professor at Chicago Business School and former chief economist of the International Monetary Fund. The effect on global imbalances, he adds, will depend on where investment increases most.
Whether the factors underpinning the rise in bond yields are cyclical or represent a lasting shift towards a new higher-interest rate, less US-centric global equilibrium, is impossible to tell.
Mohamed El-Erian, chief executive of Harvard Investment Management, says: "I think that in the short term it is going to prove to be a cyclical story."
If the real interest rate in the US rises too far, it will put downward pressure on housing and consumption, which should moderate the real rate rise. Mr Rajan, though, sees some evidence of structural change. "I think the underpinnings of this imbalance between desired savings and realised investment is narrowing," he says. "What we are seeing is a slow adjustment that is resulting in higher real interest rates."
One key test of how far the conditions for such rebalancing have been met will be whether, as higher real rates weigh on the US, improved exports can offset the drag from weaker domestic demand and keep US growth on track.
By Krishna Guha in Washington
Copyright The Financial Times Limited 2007
Published: June 13 2007 03:00 | Last updated: June 13 2007 03:00
When bond prices crash and yields go up, it is usually because of a classic inflation scare. Not this time.
The sharp rise in yields over the past few weeks - above all in the US - has been almost exclusively driven by a rise in the long-term real interest rate, with very little change in inflation compensation.
This begs the question of what is driving the rise in the real rate, whether it is likely to prove sustainable, and what it might have to do with changes in global economic imbalances.
Investors may have concerns about stronger global growth and a gradual ebbing of the disinflationary force of globalisation, but have confidence that the Federal Reserve and other central banks will rein in inflation.
In this case, underlying inflation concerns could be translated into an expectation of higher real rates over the long term, without any rise in inflation compensation. In practice, though, the lack of any noticeable rise in the inflation risk premium makes it hard to believe the rise in the real rate has been driven by inflation concerns.
Other explanations focus on the balance of desired saving and investment in an increasingly integrated global capital market.
In recent years - as Ben Bernanke, Fed chairman, has argued - a "global savings glut" outside the US has kept real interest rates low in the US and globally, pushing up the value of assets such as US property and encouraging US consumers to spend, not save.
The result has been a global low interest rate equilibrium, characterised by full employment in the US, strong global growth and large trade imbalances, including the $759bn US current account deficit.
Now some speculate that the global savings glut might be declining - and with it Alan Greenspan's famous conundrum, the failure of bond yields to rise in tandem with short-term policy rates.
"I think there is some unwinding of the conundrum here," says Peter Hooper, chief economist at Deutsche Bank securities.
One possibility is that traders may be repricing bonds in anticipation of a long-term decline in the savings rate in big emerging markets and oil exporters.
Mr Hooper says China's move to buy a stake in Blackstone, the private equity group, signalled that its reserve management policies "are shifting a bit". So far, though, the petrodollar and emerging market surpluses are undiminished; China's trade surplus is exploding upwards.
Others emphasise a rise in investment globally, with more competition for funds from non-US markets, including a strong eurozone.
"Investment - which was subdued - is beginning to pick up," says Raghuram Rajan, a professor at Chicago Business School and former chief economist of the International Monetary Fund. The effect on global imbalances, he adds, will depend on where investment increases most.
Whether the factors underpinning the rise in bond yields are cyclical or represent a lasting shift towards a new higher-interest rate, less US-centric global equilibrium, is impossible to tell.
Mohamed El-Erian, chief executive of Harvard Investment Management, says: "I think that in the short term it is going to prove to be a cyclical story."
If the real interest rate in the US rises too far, it will put downward pressure on housing and consumption, which should moderate the real rate rise. Mr Rajan, though, sees some evidence of structural change. "I think the underpinnings of this imbalance between desired savings and realised investment is narrowing," he says. "What we are seeing is a slow adjustment that is resulting in higher real interest rates."
One key test of how far the conditions for such rebalancing have been met will be whether, as higher real rates weigh on the US, improved exports can offset the drag from weaker domestic demand and keep US growth on track.
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