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May 18, 2005
Did anyone notice this? (10 year bond)
Greenspan called it a "conundrum" back in February. That sure showed the markets. Apparently the Greenspan effect has worn off. From the NY Times:
The yield on the benchmark 10-year Treasury note went below 4.10 percent yesterday for the first time since February, a move that could confound the Federal Reserve's effort to slow economic growth. At the same time, however, the rally in Treasuries appears to reflect a decline in inflationary fears.
I half expect Rod Serling to step out from behind a tree any minute.
The rest of the article tried to explain it. Here's a part of it.
William H. Gross, the manager of the world's biggest bond mutual fund - the Pimco Total Return fund - signaled Tuesday that he was moving in this direction when he said that he thought the 10-year yield would be in a range of 3 percent to 4.5 percent over the next three to five years.
Mr. Gross, in his investment outlook published Tuesday, said that the recycling of billions of dollars from Asia - mostly from China's central bank - into the Treasury market would also help keep Treasury rates low.
This is because China, even if it revalues its currency, the yuan, later this year, will still have to buy dollars and sell yuan to prevent the yuan from becoming less competitive globally too quickly. And those dollars will be used to buy Treasuries, keeping rates lower by about a percentage point than they otherwise would be, according to Mr. Gross.
Lundy Wright, who runs the Treasury desk at Nomura Securities International, said the rally in the Treasury market, was, in part, a flight to quality because of the turmoil in the corporate bond market. He said that money managers were reducing their bets until the smoke cleared. What is not contestable is that the bond market continues to be volatile as investors shift sentiment on a dime in a global economic environment where uncertainty seems to be one of the few constants. This means yesterday's move could reverse quickly.
For related reading, I direct you to Brad Setser's post from May 11.
The bond market, right now, is not for the timid.
Posted by William Polley at May 18, 2005 11:23 PM
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Comments
the ten year is under inflation?! aye carumba!
Posted by: c. at May 19, 2005 1:35 AM
re: not for the timid -- you also have all the hedge funds unwinding various leveraged positions in the CDO market and elsewhere, which seems to be (per today's FT) supporting both the $ and the ten year ... of course, at some point it will make sense to start shorting the ten-year -- but that is truely not for the timid.
Posted by: brad at May 19, 2005 11:25 AM
regarding the 10yr yield....he that sells what isnt hisnt often goes to prison.......moral of the story.......dont get short............yet.jjj
Posted by: john jansen at May 20, 2005 2:08 PM