Alan Greenspan, Federal Reserve chairman, on Monday night highlighted the unusual behaviour of global bond markets, and acknowledged that investors might be correctly signalling a period of economic weakness ahead...
"The economic and financial world is changing in ways that we still do not fully comprehend," Mr Greenspan said...
Mr Greenspan said: "One prominent hypothesis is that the markets are signalling economic weakness. This is certainly a credible notion."
The to-be-expected "But...":
But he added that there was no fully satisfying explanation for such low long-term rates, which are a worldwide phenomenon and which have been insensitive to signs of strength in the global economy.
Foreign central bank purchases of US Treasuries was part of the explanation, but the overall impact had probably been "modest", and could not explain the drop in long-term rates over the past year around the world, he said.
Similarly, global competition and the rise of China and India had contributed to lower inflation pressures, but could not account for the fall in rates.
And a warning, of sorts:
Very low long-term rates had contributed to speculative activity by investors searching for yield, including possibly excessive flows into hedge funds and private equity funds, that was likely to result in diminishing investment returns, he said.
"After its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy," he said, adding that sensible risk-management by banks and other financial institutions meant there should not be systemic problems.
Greg Ip adds this:
In response to questions, he suggested that the globalization of capital markets is a major factor. Since 1995, he said, investors around the world have been increasingly willing to invest beyond their borders. "I do think the most relevant and likely reason why we're dealing with this is new forces at play in the international market," he said.
Jean Claude Trichet, president of the European Central Bank, concurred, telling the group that inflation-adjusted bond yields in Europe and the U.S. are almost identical now, "a clear demonstration we are living in a single world."
And, from Bloomberg, the talking heads talk:
"It's as if Greenspan has given his consent for the level on yields on long-term bonds,'' said John Davies, a bond strategist in London at WestLB AG. "He seems to have softened his stance and that's given the go-ahead for some people to buy at these levels.''...
"Greenspan thinks traders are taking too much risk and is not happy with long term rates,'' said Andrew Brenner, head of global fixed income in New York at Investec U.S. Inc.
Got that? Anyway, there does appear to be plenty of support for the view that things are not going to change soon:
Greenspan "did acknowledge that this is a reaction to a weakening economic outlook and that that might be right,'' said Charles Diebel, chief European bond strategist at Royal Bank of Scotland Group Plc in London. "We're in a low-yield environment and we could see yields get to 3.75 percent or a touch lower.''...
"He's suggesting he's not expecting to see a change in yields anytime soon and that's great'' for bulls on Treasuries, said Andrew Roberts, Merrill Lynch & Co.'s chief European fixed- income strategist in London. "The market is coming to terms with the fact that inflation is going to stay tame.''
Merrill's interest-rate strategy committee, of which Roberts is a member, cut its forecast for Treasury yields last month. The group now expects the 10-year note to yield 3.8 percent at year- end, down from a previous estimate of 4.4 percent. Pension fund buying is helping depress yields, Roberts said.
But then again:
"We sold some 10-year Treasuries over the past few days,'' said Satoshi Asai, who helps oversee $1 billion of bonds in Tokyo at Sompo Japan Asset Management, a unit of the nation's third- largest casualty insurer. "We are not bullish on the outlook of Treasury notes at all.''
OK. I guess maybe the answer to this posts question is "no."