Posts filed under “Fixed Income/Interest Rates”

More Conundrum

Interesting WSJ discussion on the flattening yield curve:

"Economists’ explanations for what is happening to yields vary, many amounting to too much money chasing too few long-term investments, pushing prices up and potential returns down. Asian central banks and private investors, for example, have been big buyers of U.S. bonds. And as the U.S. population ages and the government prods companies to better fund their pension plans, demand has grown for the kind of long-term bonds that can guarantee payments to future retirees.

The Fed’s own actions also have played a leading role in keeping long-term interest rates low. Over the past year, the Fed has been unusually open about signaling its intentions to the market before each of its short-term rate increases. The predictability of Fed policy has calmed peoples’ worries that a sudden increase in inflation could erode the value of their investments, making investors more willing to part with their money longer, for little extra return.

You know the real reason I’m a referncing this is because I am some bizarre combination of a graphic groupie and a chart whore. Well, we aim to please:

click for larger graphic


What’s this mean to investors? In a word, RISK:

"It has also encouraged investors to take on more risk — for example, by buying long-term bonds with money borrowed at short-term rates. In one indication of investors’ rising tolerance for risk, securities dealers’ outstanding short-term loans to their clients reached an all-time high of $3.5 trillion at the end of June, though it has decreased somewhat since.

If strong economic data — or some shock such as a sudden rise in inflation — prompt investors to sell bonds purchased on borrowed funds, long-term interest rates could jump. For now, though, added demand for long-term bonds is pushing prices up and interest rates down, undermining the Fed’s ability to influence long-term rates."

Go figure. Ultra-low rates encourages speculation in the fixed income markets.

When all is said and done about Greenspan’s Chairmanship, I believe his final legacy will be his surprising willingness to encourage specualtion — in Nasdaq stocks, in Real Estate anmd now in Bonds.

Fed’s Fight Squeezes Banks, Spooks Markets
Vanishing Gap Between Rates For Long- and Short-Term Debt Means Lower Profits for Lenders
WALL STREET JOURNAL, August 9, 2005; Page C1,,SB112351375695107584,00.html

Category: Economy, Fixed Income/Interest Rates

Real Federal Funds Rate: Hikes with Teeth

Category: Economy, Fixed Income/Interest Rates

Fed Follow Up

Category: Economy, Fixed Income/Interest Rates

Real Estate Begins to Cool

Category: Economy, Fixed Income/Interest Rates, Real Estate

Is the Bond Market Hampering the Fed?

Category: Economy, Fixed Income/Interest Rates

The Return of the 30 Year Bond

Category: Economy, Fixed Income/Interest Rates, Politics

Fed and Markets

Category: Fixed Income/Interest Rates, Markets

Vulnerable Mortgages and the Depegging of the Chinese Yuan-

Category: Currency, Fixed Income/Interest Rates, Real Estate

Federal Reserve Responsibilities Outsourced to China

Category: Currency, Economy, Fixed Income/Interest Rates, Politics, Real Estate

Macro Movers for 2H 2005

Category: Commodities, Economy, Fixed Income/Interest Rates, Podcast