Steve Liesman’s WSJ column, the Macro Investor, often asks intriguing questions. Friday’s column was no different: The issue is how orderly are bond markets, or, phrased differently, are fixed income markets as wild as equities?
Liesman wants to dissuade people from the myth that the Bond Ghouls are somehow less subject to the animal spirits than their counterparts on equity desks:
"We’d all like to think interest rates are set in this world as part of a deliberate process, where traders coolly assess and price inflation and growth risks and then rationally buy and sell bonds.
If you believe that after reviewing this week’s tumultuous trading in U.S. Treasurys, I have a bridge to sell you.
The 10-year Treasury’s yield Wednesday surged from 4.37% to 4.52% — the sharpest increase in nearly nine months. The wild ride spoke volumes about just how nervous stock and bond markets really are about inflation, oil prices, China, and world growth — and just how global the bond market really is.
They also may have told us that financial markets often act rationally, but for what appear to be irrational reasons."
Pretty straight forward observation. Have a look at how Bond yields moved that day:
click for larger graphic
Graphic courtesy of WSJ
"It isn’t especially profound to point out that, in the absence of important U.S. data, markets will react to other information from major economies. What’s interesting is how violently markets reacted, suggesting an anxiety about bond prices and yields at current levels.
The bond market has been in uncharted territory for a while. Rates have remained relatively low while the Federal Reserve has added 1.5 percentage points to its overnight lending rate. Traders have wondered for a while when rates would rise to match the Fed’s target. They’ve been sure it would happen by now, predicting a 10-year yield as high as 5% by the year’s end. To be sure, many traders unsuccessfully predicted higher yields by the end of 2004."
Instructive stuff . . .
On the Trail of a Treasury Rout
Steve Liesman, The Macro Investor
WSJ, March 11, 2005
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