Let's hear your explanation of the "conundrum"

Discussion in 'Economics' started by McCloud, Jun 3, 2005.

  1. McCloud


    Since 2004 the fed has raised the fed funds rate 3 full percentage points.

    The 30 yr fixed rate mortgages in 2003 averaged 5.8%, in 2004 averaged 5.8% and today the 30 yr fixed rate is 5.7%!

    No one seems to have a rational explanation of why the bond rates and mortgage rates haven't followed suit!

    Why the "conundrum"?!

    Does the bond market know something that no one else knows? Is china or some other foreign country buying treasuries hand over fist to keep the rates low? Or are the bond traders blind as a bat in the biggest bond bubble of the recent history?
  2. It is not a 'conundrum' at all. When short-term rates are raised, you are reducing the posibility of future growth, and inflation. The long end would only go up while the short end is raised if the market thought inflation was running away & the fed playing catch-up.
  3. slickman


    When there's no more demand for this low-rate long term stuff they'll go up. An idea might be that the aversion for stocks is so great that money must find a home and since piggies think bonds are the ultimate safe place to be they're buying up the whole long end.

    Perhaps after a pause in rises, the fed will continue to rise again and bait the people to go to the short end. Why extend 30 extra years for 1%? That's way too much risk for way too little money.
  4. tomcole


    The gap between long term bonds and stocks has widened considerably in stocks favor.
  5. Also not many places in the world you can get better long term yields.
  6. maybe they actually want yields to be lower? all they haveto do is come out with a strong statemtn when they do a speech and thats that, but hey dont which makes me think. also when i look at long term yields across the world, all central banks are letting em drop. it will probably reverse when they stop raising rates! i just want to be ready to sell when the tide turns cause i think everyone andtheir dog is long now but i aint fighting it either:D
  7. foreign money can buy our bonds and make money on the currency if we have an appreciating dollar against their currency so they dont need much yield.
  8. The current conundrum in the fed's policy is based upon underlying deflationary influences to the dollar and US economy.

    The fed, controlling interest rates and money supply, manages inflation. A little is good, a lot is generally bad. However, if the economy goes into deflation, the fed can't drop interest rates below zero, and can't influence policy. That, from the standpoint of the fed, is very bad.

    After the internet crash there were strong deflationary influences in the economy. My personal opinion is that they were tied to an overly strong dollar and the 'china effect' of production of goods at next to nothing prices. Underlying them, more importantly, was the aging demographic of the USA and the world. Seniors don't spend - they save. That's deflationary.

    So, Alan & Co. decided to rescue the economy from a deflationary spiral by pumping up the money supply and devaluing the USD relative to the non-asian currencies. And about at this time, *coincidentally*, the price of oil soared. That created a bit of inflation, didn't it? The problem is, deflationary influences, outside of the speculative housing market, are still around in the market. That was the whole point of Bush's 'private savings' Social Security reform package - to inject a massive stimulus into the equity market by allowing entry of the huddled masses into the equity markets through their social security accounts. Too bad for Wall St. it didn't go through.

    For you, see, despite manipulation & machination, the long yields remain anaemic. That's probably because as the boomers switch from equities to stocks, it will cause depression of bond yields as boomers buy bonds and sell stocks (depressing equity market yields also). Those yields could be pathetic - 3-4%! We may reminisce fondly for the days of a guaranteed 6% tax free yield on the long bond.

    But fear not young traders. Yields MUST rise on the far end of the curve and equities must also rise to allow for a cushion before 2010, or a new asset class (convertibles, anyone?) may be preferentially treated by tax laws to improve yield and start a new equity bull market, to be followed by a bond bull market... either that or our society implodes.

    THAT's what the conundrum is, and why.

    Its just so hard to buy in at these levels, isn't it?
  9. It's simply the Asian Central Banks, who are buying dollar-denominated assets to maintain their USD-peg (mostly China nowadays, Japan and Korea in the recent past)

    The paper money to do this, is mostly created out of thin air (i.e. non-sterilized interventions). Also China re-routes "hot" money which comes into the country to bet on the reval, back into USD.

    This has the effect of asset (bonds, real estate, stocks etc) price inflation.

    Per the experience of many people (myself included) it's also causing inflation in many basic goods. But the orwelian "Ministry of Truth" and the mainstream press insist that CPI runs at 2-3%

    The whole scheme is a big experiment of man-kind to find out if we can borrow our way into financial prosperity.

    Look at the charts of last 3 years:

    Stocks up
    Bonds (30yr bond yield touched all time lows today) up
    Real estate (ultra-bubble) up
    Commodities (CRB, GSCI) up
  10. silk


    Its a global bond bubble. The crashing of this in coming years could lead to worst depression ever. Should be interesting.

    No way is 3% a fair interest rate. Some day markets will demand much higher rates.
    #10     Jun 3, 2005