Saturday, June 25, 2005

THE INVISIBLE MAN

Yet more evidence that, in the face of overaccumulation, Alan Greenspan is the invisible man as far as long-term interest rates go.
US 10-year Treasury yields looked set to close below 4 per cent this week even as investors prepared for the Federal Reserve to raise short-term interest rates again next week.

At the same time, the yield on the German 10-year Bund fell as low as 3.105 per cent on Friday, its lowest since Bundesbank records began in 1973. . . .

David Rosenberg, chief US economist at Merrill Lynch says yields at these levels are hardly such a conundrum if one takes a starting point of June 2003, when the 10-year touched a low of 3.1 per cent as investors worried about the spectre of deflation. From then until 2004, yields rose as investors prepared for the eventual rise in short term rates. �The 10-year is merely in the mid-point of the range since that time,� he said in a research note.
As the Fed continues to top up interest rates, the rest of the world is cutting them like gangbusters. The Bank of Sweden lowered rates 50 basis points on Tuesday to 1.5%; a minority of the Bank of England's monetary policy committee voted for rate cuts at their June meeting, the first time anybody voted for reductions in nearly two years; the Bank of Japan publicy professed its commitment again today to what Rueters calls its "ultra-easy monetary policy"; and everybody and their brother and their brother's neighbor are putting mounting pressure on the European Central Bank to drop rates from its longstanding 2.0%. With a commitment to a ridiculously low inflation rate of 2%, the ECB is still digging in its heels, but the planets are beginning to align against them.

15 Comments:

At 10:58 PM, Blogger calmo said...

You figure the chief economist at Merill Lynch plays poker with Poole who also thinks this "conundrum" is a bunch of malarkey?
Do I need to point out that the prime in 03 was 1% and therefore 3% 10yr rates were not interesting? The item that has our attention is the spread (not the rate) between the prime and the 10yr rate which happens to be 4%.
Greenspan is worried that the 10yr rate won't rise with another push on the prime. If the 10yr rate remains fixed, suspicions will be confirmed that the Fed really doesn't have control over monetary policy; that the accomodating/tightening really starts with mortgage money and the 10yr rate; that the prime rate was just froth for the HFs.
The flattening of the yield curve is already driving some HFs out of business, no?
The Futures have this next one already priced in but uncertain about the next one. If there is no movement in the 10yr with a 3.25% prime, AG will pause at 3.25, IMHO.

 
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