The short view By John Authers - Last week's huge sell-off in the US treasury bond market
The short view By John Authers
Copyright The Financial Times Limited 2007
Published: June 12 2007 03:00 | Last updated: June 12 2007 03:00
Contagion from the Asia-Pacific region has been a concern for a while. But should we have worried about Wellington, not Shanghai?
Explanations for last week's huge sell-off in the US treasury bond market abound. Some are benign. Yields on long-dated bonds have been lower than on shorter-dated bonds for months (known as an "inverted yield curve"). Investors usually need a higher interest rate to compensate for the risk of lending over longer periods. So last week's jump in 10-year bond yields may be a "normalisation".
Further, bond yields should relate to inflation. Over the past 50 years, brokerage firmAG Edwards says, 10-year yields have on average been 2.7 percentage points above core inflation. That gives an expected yield of 5.1 per cent - which is where the 10-year yield has, for now, come to rest.
Then there are the malign explanations. Maybe traders took fright when they saw that Asian central banks, the key source of demand for US bonds, were no longer active buyers in the latest auctions. If a big source of demand were to depart permanently, bond prices would fall, regardless of fundamentals.
Or maybe the spark came from the Reserve Bank of New Zealand. There is huge speculation in the New Zealand dollar (kiwi), thanks to the high interest rates there. The US dollar has dropped by 22 per cent against the kiwi since last June and by 12 per cent since March. It is caused by hedge funds borrowing cheaply in yen and parking in high kiwi rates. Some say this "carry trade" has supplied the liquidity that has bid up bond prices.
The RBNZ raised rates on Thursday. If even the RBNZ, burdened by an overvalued kiwi, was raising rates to fight inflation, traders may have reasoned, yields could not stay so low. And the RBNZ's intervention to weaken the kiwi yesterday may signal trouble for the "carry trade" and with it easy money. That, at any rate, is the malign interpretation.
Copyright The Financial Times Limited 2007
Published: June 12 2007 03:00 | Last updated: June 12 2007 03:00
Contagion from the Asia-Pacific region has been a concern for a while. But should we have worried about Wellington, not Shanghai?
Explanations for last week's huge sell-off in the US treasury bond market abound. Some are benign. Yields on long-dated bonds have been lower than on shorter-dated bonds for months (known as an "inverted yield curve"). Investors usually need a higher interest rate to compensate for the risk of lending over longer periods. So last week's jump in 10-year bond yields may be a "normalisation".
Further, bond yields should relate to inflation. Over the past 50 years, brokerage firmAG Edwards says, 10-year yields have on average been 2.7 percentage points above core inflation. That gives an expected yield of 5.1 per cent - which is where the 10-year yield has, for now, come to rest.
Then there are the malign explanations. Maybe traders took fright when they saw that Asian central banks, the key source of demand for US bonds, were no longer active buyers in the latest auctions. If a big source of demand were to depart permanently, bond prices would fall, regardless of fundamentals.
Or maybe the spark came from the Reserve Bank of New Zealand. There is huge speculation in the New Zealand dollar (kiwi), thanks to the high interest rates there. The US dollar has dropped by 22 per cent against the kiwi since last June and by 12 per cent since March. It is caused by hedge funds borrowing cheaply in yen and parking in high kiwi rates. Some say this "carry trade" has supplied the liquidity that has bid up bond prices.
The RBNZ raised rates on Thursday. If even the RBNZ, burdened by an overvalued kiwi, was raising rates to fight inflation, traders may have reasoned, yields could not stay so low. And the RBNZ's intervention to weaken the kiwi yesterday may signal trouble for the "carry trade" and with it easy money. That, at any rate, is the malign interpretation.
posted by Carlos T Mock at 6:55 AM
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