Stocks or Bonds? And We Have Our Answer...
A: It all becomes clear why bond markets disconnected so much from equities recently. The reason is because the marts sniffed out more QE by the fed, and today's announcement confirms the new plans.
Via Bloomberg, "Fed to Reinvest Mortgage Proceeds Into Long-Term Treasuries":
Federal Reserve officials decided to reinvest principal payments on mortgage holdings into long-term Treasury securities, making their first attempt to bolster growth since March 2009 to keep the slowing U.S. economy from relapsing into recession.Bonds were pricing that in over the past month and the moves today are being amplified by the announcement. Sometimes its buy the rumor, sell the news and other times the news sends the trend into euphoria. Risk assets may get another ride with this news, and explains why stocks held their own while bond markets seemed to be pricing in economic weakness ahead.
“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement in Washington. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level.” The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”
With growth weakening in the second quarter and company job gains in July falling short of estimates, today’s step signals that risks of a downturn have increased enough for the Fed to delay its exit from unprecedented stimulus. Chairman Ben S. Bernanke told Congress last month that the Fed was “prepared to take further policy actions as needed.”
The Fed said it will “continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.” The reinvestment policy applies to agency debt and agency mortgage- backed securities held by the central bank.
How long the chase for yield goes on for, is anybody's guess. For now, party on!
Posted by UPennAlaskan
Tue Aug 10th, 2010 07:29 PM
The value of things people own (real estate, cars, iphones, etc) is falling whereas the cost of stuff people buy keeps going up (gas, education/college, health care, food). Deflation for certain things and massive inflation for everything else.
The original iphone was $500/600 brand new and now iPhone 4 is $200/$300. Anyone following wheat lately? It went parabolic to the upside. The CPI is really something special. :-)
QE can at best only reinflate the stuff that is deflating, cheers.
Posted by MeekSheep
Wed Aug 11th, 2010 08:03 AM
wheat is not a very good example although some of what you are saying does ring true.
Posted by In Debt We Trust
Wed Aug 11th, 2010 11:34 AM
The real story is happening in Asia. Look here at China's endorsement of Japan b/c of their concern over the dollar. Given China's traditional antipathy towards Japan it's a bit like Israel endorsing Germany bunds.
"The purpose for the Fed in buying Treasuries is to support U.S. economic growth, which is positive," he said.
Investing in Japanese bonds is safer because so much of the country's debt is held domestically, and the yen is on course to strengthen further, said Zhang Ming, an economist with the Chinese Academy of Social Sciences, a top government think-tank.
"Even though the difference in yields is big, China has been abandoning U.S. debt and picking up Japanese debt. This definitely shows that it believes the risks of U.S. debt far exceed those of Japanese debt," Zhang said in a report issued by his research institute.
Chinese has already bought more than a net 1.7 trillion yen ($19.9 billion) of Japanese debt in 2010, far surpassing its record of 255.7 billion yen in 2005.
The two-year U.S. Treasury note yield fell to a record low of 0.493 percent on Wednesday. Japan's two-year notes are yielding around 0.135 percent, but all eyes are on the yen, which hit a 15-year high against the ailing dollar.
http://www.reuters.com/article/idUSTRE67A23920100811
Posted by anonymous
Wed Aug 11th, 2010 01:01 PM
In Debt We Trust,
I think that article seems to be exaggerating reality and ignoring the nuances of the situation. Also, remember that it came from a government think tank in China, therefore will reitirate only what the gov. deems acceptable.
1. China may be diversifying into Japan not because it is a better risk reward on a stand-alone basis, but in terms of the portfolio, the benefits of diversification outweigh the loss of yield. I would bet that diversification drives that move more than Japanese currency/credit risk.
2. China is not an investment advisor. It is a country with political goals. The fact that Japan is its enemy may be a motivator. With ownership of Japanese debt, China would be able to exert influence on Japan. Unlike China's holdings in U.S. debt which are too big to liquidate, a Chinese threat to dump Japanese bonds and send its interest rates through the roof are more credible.
Nevertheless, I do agree that China is probably looking for safer places to put its money, but I think that simple fundamentals are just part of the story.
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Thu Aug 12th, 2010 11:17 PM
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Posted by Fred
Fri Aug 13th, 2010 09:21 AM
China for me is like watching competitive Whack-a-mole. The only exit is yuan appreciation, no way around that. Until the yuan resets and the USD debases, there will be no recovery for the US consumer because jobs growth by definition will only occur after we can compete, both internationally and domestically.
This is a long, slow shift. I was, however, surprised a bit by Germany's GDP numbers this morning.
Posted by Conscience of a Conservative
Sat Aug 14th, 2010 02:52 PM
http://www.ritholtz.com/blog/2010/08/stocks-vs-bonds-2/
It’s for good reason the stock market was dubbed “the bond market’s idiot kid brother.”
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