Stephen Roach has been having a rethink on bonds:
"When I first wrote of an interest rate conundrum in January, little did I know how deeply this concept was about to become ingrained in the heart and soul of central banks and financial markets......But conundrum it is, as real rates remain at unbelievably low levels at the short and long end alike -- in the US, Europe, Japan, and even emerging markets. Given my concerns over the US current account deficit, I have long in the bearish camp with respect to the US bond market outlook. A rethinking is now in order. The likelihood of a China-led slowing of Asia has prompted me to change my view. I now suspect bond yields will stay low for the foreseeable future, and I wouldn’t rule out the possibility that they might even drift lower".
This was written on Monday. Short term confirmation of what he 'wouldn't rule out' wasn't long in coming: on Tuesday the 3 1/4 percent German bund due in July 2015 fell to an all time record low yield of 3.22%. This left a gap of 1.22% with the ECB base rate, the narrowest gap since the last time the Frankfurt-based central bank cut interest rates in June 2003. This may indicate that Trichet's room to *not* cut rates is reducing.
Meanwhile yesterday in the US ten-year yields closed below 4 percent on consecutive days for the first time since October.
Also it is significant to note that eurozone government bond yields no longer automatically move in the same direction: whilst the yield on the Germnan 10 year bund rose 1 base point to 3.24 percent, the yield on France's 3 1/2 percent bond due April 2015 was little changed at 3.25 percent, and the yield on the Italian 10-year bond rose 1 base point to 3.45 percent.
The impact all these low yields and the economic uncertainty are having in the US? Well, as I suggested here at Bonobo recently, they are really reducing Greenspans 'room to manoeuvre' down at the Fed. This reality was floated yesterday in a speech from Dallas Fed President Richard Fisher (in a move where he is widely interpreted as acting as Greenspan's emmisary), suggesing that the 'tightening' process may be nearing its end. Which brings us back to Stephen Roach: interest rates may be in the process of stabilising on the downside, and we are maybe near the peak of the tightening process.
With the ECB stuck at 2%, the BoJ at 0%, and the Fed at 3.5%, that speaks volumes for the depth of the global liquidity markets these days.
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