There were several things we didn’t get to discuss last night regarding the Conundrum discussion.
1. Demand and Supply issue
Since the 30 year was cancelled, its a simple matter of the supply/demand equation. With less 30 year’s around, the price gets bid up, and the yield lowers. So Bond managers look to the 10 year, yielding only moderately less 4.41 versus 4.07 — but a third of long a duration.
Why is it that everyone in America – from Businesses to each and every homeowner has refinanced their debt at half century low levels – except for America itself? Who ever decided to cancel the 30 year owes Uncle Sam a big apology.
2. Deflation warning.
Now that we seem to have inflation licked, there’s still that nasty worry about Asia exporting Deflation to the U.S. That will likely be the next battle. Unless we want to ignorethe warning signs — wage pressure, ever decreasing prices for finished goods, coupled with weak demand — Deflation remains a genuine concern.
3. Its good for China
China has developed the biggest appetite for US treasuries – and Why not? The balance of trade deficit gives them more cash than they know what to do with. Why not buy US Bonds, and keep rates low for finance-loving Chinese-goods purchasing US Consumers? Until they are so stuffed with dollars that they have no where else to put them, and then they can dump them on the open market. While we are dealing with that mess, China then invades Taiwan. You read it here first.
4. Bond Market is foreseeing an economic slowdown in 2006
This is the ugliest component – the Bond market may be foretelling a slowdown into 2006. Watch the market slong enough, and you cannot help but notice that the bond markets are the “adult supervision;” Equities markets, on the other hand, are more akin to a hormone addled teenager.
I’d be interested in hearing any other factors keeping rates low. Post below, and I’ll excerpt the best ones here later.
For the other side of the argument, see Richard Clarida’s WSJ OP-ED, Our Post-Bubble World.