The Short View: US Treasuries By John Authers, Investment Editor
The Short View: US Treasuries By John Authers, Investment Editor
Copyright The Financial Times Limited 2007
Published: June 13 2007 16:52 | Last updated: June 13 2007 16:52
If you find bond mathematics difficult, you are not alone. The mere fact that the key measure of bond performance is the yield, which goes up when investors are losing money, and down when they are gaining, is befuddlingly counter-intuitive.
So take comfort from events on Wednesday. US treasury prices had plummeted. In the space of five trading days, their yield moved from 4.9 to 5.3 per cent, matching the sharpest weekly move of the decade. The price of money in the US, and much of the world, was at its highest in five years as New York traders went home on Tuesday.
Wednesday morning saw May’s US retail sales figures. They were much stronger than expected, showing that US consumers were not deterred from their normal buying habits either by historically high gasoline prices, or by the nasty jolt to their wealth from declining house prices.
This was unambiguously bad for bonds (or good for yields). It meant the economy was stronger, and hence inflation risks were greater, than thought. That improved the case for the Federal Reserve to raise rates. And that should mean mean higher bond yields.
What happened? Yields ticked up instantly after the data was released. Then there was a wave of buying, and within half an hour, the 10-year yield dropped from 5.3 to below 5.2 per cent. A cue to sell bonds was treated as an opportunity to buy them.
At such times, animal spirits matter more than fundamentals. Analysts of trading patterns had predicted something like this could happen. Alan Rohrbach, a Chicago-based analyst, pointed out just before Wednesday’s bounce that a break through several psychological landmarks had come just as a long-term trend (for rising yields) was looking over-extended, and as bearish sentiment had become overwhelming.
These were reasons to buy. A fundamental reason to sell made for a better opportunity. Expect more such tests of logic before bond markets calm down.
Copyright The Financial Times Limited 2007
Published: June 13 2007 16:52 | Last updated: June 13 2007 16:52
If you find bond mathematics difficult, you are not alone. The mere fact that the key measure of bond performance is the yield, which goes up when investors are losing money, and down when they are gaining, is befuddlingly counter-intuitive.
So take comfort from events on Wednesday. US treasury prices had plummeted. In the space of five trading days, their yield moved from 4.9 to 5.3 per cent, matching the sharpest weekly move of the decade. The price of money in the US, and much of the world, was at its highest in five years as New York traders went home on Tuesday.
Wednesday morning saw May’s US retail sales figures. They were much stronger than expected, showing that US consumers were not deterred from their normal buying habits either by historically high gasoline prices, or by the nasty jolt to their wealth from declining house prices.
This was unambiguously bad for bonds (or good for yields). It meant the economy was stronger, and hence inflation risks were greater, than thought. That improved the case for the Federal Reserve to raise rates. And that should mean mean higher bond yields.
What happened? Yields ticked up instantly after the data was released. Then there was a wave of buying, and within half an hour, the 10-year yield dropped from 5.3 to below 5.2 per cent. A cue to sell bonds was treated as an opportunity to buy them.
At such times, animal spirits matter more than fundamentals. Analysts of trading patterns had predicted something like this could happen. Alan Rohrbach, a Chicago-based analyst, pointed out just before Wednesday’s bounce that a break through several psychological landmarks had come just as a long-term trend (for rising yields) was looking over-extended, and as bearish sentiment had become overwhelming.
These were reasons to buy. A fundamental reason to sell made for a better opportunity. Expect more such tests of logic before bond markets calm down.
posted by Carlos T Mock at 9:47 AM
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