A pithy summary of the (bond) world
Bond-market blogger John Jansen is more skilled at offering pithy commentary than I am. His comments on the market one day last week capture the core of today’s global economy – at least today’s international financial system. Jansen:
It was an active overseas session.
Asian buyers of 2 year notes.
End user and swap desk buying of 10year notes.
Banks and hot money selling 5 years.
Asian buyers of 5years.
Central banks buying across the curve.
Middle Eastern bill buyers.
Central bank buying across the curve. That is a pretty good title for much of my recent work — though I tend to get hung up explaining why not all those purchases register in the US data in real time.
A lot of recent central bank purchases have actually been showing up in the US data, or at least in the Federal Reserve Bank of New York’s custodial accounts. Those accounts have been growing at a $40b a month pace in 2008,or an annual pace of close to $500 billion. That is real money in my book. And with central bank reserve growth running at close to $100b a month on average in 2007 — and likely a comparable pace in 2008 — the FRBNY custodial accounts probably aren’t picking up all central bank purchases.
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contributors to your blog appear to occupy quite a broad spectrum from those who foresee a deflationary outcome to the currrent imbalances – to those who believe in the helicopter/confetti dollar scenario.
talk is cheap. but actual investors have to put their money where their mouth is – so what are they saying ? is there some ‘decoupling’ between this bond market and the goldbugs ( zincbugs, tinbugs, barleybugs, cottonbugs, cornbugs, coffeebugs, silverbugs, copperbugs, leadbugs, oatbugs, and wheatbugs ) who have spoken so loudly since this year opened ?
Could you flush out a little more of the significance of these purchases? Do these central bank purchases mean the development of more asset bubbles in the US and globally? Is that your concern? Or does this mean that the central banks are trying to prevent a really big problem from developing in the US and feel a need to supply a large amounts of capital to prevent a major recession/depression from developing and the magnitude of these purchases are symbolic of the severity of the looming problem? Also why do the central banks feel a need to conceal their purchases? Is there some sort of agency issue where if they said what they were doing, traders might try to countermand their stragedy? Why no transparency from these governmental officials?
I feel like I am missing the forest from the trees?
they could mean more bubbles, but right now they are more a force trying to slow the deflation of a set of credit bubbles that themselves emerged in part from the surge in central bank demand. above all, though, they are a reflection of currency policies that keep many currencies weaker than they otherwise would be. that in my view means less demand for uS exports, more US demand for the world’s imports, a bigger trade deficit, more us external debt and a slightly different composition of US output than otherwise would have been the case. For several years, demand for uS bonds (including agencies and private MBS) really helped spur the housing sector; now central bank purchases are in effect financing the US as it works out the difficulties associated with an over-inflated housing sector.
some central banks do worry about the market knowing too much about their activities — like some private fund managers worry that others are taking advantage of their trades. some central banks do try to conceal their portfolio — or at least use private fund managers which has the effect of concealing their portfolio. but most of the gaps simply reflect the difficulties collecting data on financial flows in an increasingly global economy. most central banks don’t care if they buy from a bank in New York or a BAnk in London.
The biggest factor pumping up demand around the globe is the Fed’s excessive money creation and irresponsible monetary easing, which requires foreign central banks to follow suit to keep their own currencies in relative alignment with the dollar. Of course, some increased demand is genuine, but that demand is being met by increased supply. It is only the artificial demand created by inflation that is pushing up prices. There is only one type of inflation, which is an expansion of the supply of money and credit. Prices do not inflate; they merely rise and fall.
a) nothing requires other sovereign nations follow suit, or put a priority on maintaining alignment with the $ over their own macroeconomic goals.
b) Australia (raising rates) and the ECB (holding steady)are cases in point
it actually isn’t all that clear that the fed is expanding its balance sheet (i.e. printing money0 either. it has lowered rates, but that hasn’t taken much balance sheet expansion. it certainly has made some changes to the composition of its balance sheet tho.
the commodity market (through the roof, and presumably good for irish farmers) and bond market (falling nominal rates = no concerns re inflation) disconnect is pretty big. Am curious what others would point to as an explanation.
The same players are doing the samething. No one wants to see this whole system go down the toliet because it would mean global chaos.
Gillies: the bulk of my personal investments are in U.S. treasuries concentrated in the short end of the curve, so by any absolute metric, I’ve been long and wrong so far. I still don’t believe there’s any way out of this without higher real rates to encourage savings and attract capital.
I feel like I might be wrong for some time to come, and that’s okay with me.
As for the bond market, if all official purchases ended, I think you’d see some high prices for future money. The bond vigilantes have been pretty thoroughly outgunned. What we have now is the bond police, who have their own little reasons for turning a blind eye. “Inflation? I’m shocked to hear that inflation is going on here.”
Of course, this is assuming the CBs bought something other than bonds with their minty-fresh bills. The counterfactuals become increasingly pointless. What they’re doing is buying bonds, and making bonds an uncompetitive way to transfer money from the present into the future. If you think of a government bond as a banknote with a “not valid until” date, what you see is generalized money-printing.
It certainly doesn’t matter that the Fed is not expanding its balance sheet, when other CBs who issue bills which are undervalued at their dollar peg are. As I’ve said before, if you analyze the world as a single nation and the world’s CBs as a single entity, the oatbugs are no mystery.
ndk, there are two ways out: back and through. What’s disturbing is that at the moment, they both seem extremely implausible.
I presume you should have said “low prices for future money”?
As I have said before, I do not think that you can count issuing bonds as printing future money unless you net off future withdrawals by expected taxation. If the government are expected to raise taxes in future to make honest repayment, then government borrowing need not be a harbinger of inflation.
Gillies I m part of those who believe in deflation DESPITGE any helicopter drop actions… (and the bigger those are the better).
“the commodity market (through the roof, and presumably good for irish farmers) and bond market (falling nominal rates = no concerns re inflation) disconnect is pretty big. Am curious what others would point to as an explanation.”
The commiodity has a future value which in itself is not dependent upon any given currency, as such.
The bond is firmly hooked up to a given currency. In an environment where radical shift in currency value, and inflation/stagflation looms here there and everywhere, the investor is more reluctant to take a stand -currency wise.
Since at least the 1990s, China and India have been manipulating their currency in order to get an unfair competitive advantage for exports. It seems apparent that foreign government policies of currency devaluation and the need to maintain dollar reserves to support this manipulation is the root cause of “easy” credit in the US housing market that created the bubble. Can China with it’s vast dollar holdings cause all this inflation by diversifying into commodities, especially oil? Also, what about India? I read in an earlier post that they don’t have the large dollar reserves that China has. If new dollars going into India slow down substantially, will commodity shortages develop in India?