Four perky articles on bonds and the trade deficit: "Natural corrections", "headaches for homeowners", "shun housing stocks", and falling interest in buying US Treasury bonds. On the positive side, they say than an "inverted yield curve" (when short term rates are higher than long term rates) doesnt ALWAYS presage a recession...
Alan Greenspan. Hmmm... The power of "natural correction" shall be interesting to see.
Greenspan Sees No Policy Edge To Fix Trade Gap
November 15, 2005
Federal Reserve Chairman Alan Greenspan said there is little policy makers can do to correct the enormous U.S. trade deficit, such as driving down the dollar, raising interest rates or cutting the budget deficit.
Instead, he said, market forces are likely to correct the deficit naturally as foreign investors worry about owning too many dollar-denominated assets and buy less, as Americans strive to save more.
The current-account deficit is a cloud over Mr. Greenspan's legacy as he approaches retirement in January. Some critics say the Fed's earlier low-interest-rate policies have encouraged Americans to spend beyond their means. They say the resulting U.S. foreign debt may trigger a crisis, with a rapid fall in the dollar and jump in interest rates.
Mr. Greenspan portrayed the deficit as the product of an intricate set of decisions by U.S. and foreign investors that can't be addressed through specific policy actions. That view appeared to contrast with that of U.S. and foreign officials who say that reducing the budget deficit and allowing the dollar to fall against other currencies would reduce the current-account deficit.
If the 10 year loan costs you as much as the 1 year loan, why use a 10 year loan? That is question facing the bond market.
Bonds Signal Challenges Ahead for Economy
As Long-Term Interest Rates Rise, Will Homeowners Feel the Pinch? Market Has Called It Wrong Before
November 16, 2005
The U.S. economy has been on an impressive run, logging its most stable stretch of expansion ever. But the bond market is signaling trouble ahead.
Even as long-term interest rates have risen to levels not seen in many months, the Federal Reserve has driven short-term borrowing rates up even faster, closing the gap between short and long rates in a trend known as a flattening yield curve. Meanwhile, the prices of certain mortgage bonds have fallen, pushing their yields up.
"What that's telling you is that the Fed is going to be successful in popping the real-estate bubble," says Robert Smith, who manages about $1.4 billion in bond investments as chief investment officer at Smith Affiliated Capital Corp. in New York.
Say hello to the inverted yield curve.
A Message in the Bond Market
As Long and Short Rates Converge, Advisers Push Cash but Shun Bank and Housing Stocks
November 17, 2005
If you own bank stocks, high-yield bonds or a home with a big adjustable-rate mortgage, the bond market may have bad news for you.
In recent weeks, professional investors and economists have been carefully tracking the difference between yields on short-term and long-term Treasury notes. Historically, the difference is usually big, about three-quarters of a point, signaling that investors expect solid economic growth and consequently demand higher long-term returns. Recently, the difference between yields on short-term and long-term Treasury notes has all but disappeared, which could mean trouble for the economy.
Some economists and analysts predict that the Federal Reserve's efforts to curb inflation by raising short-term interest rates soon could push them above long-term rates, a phenomenon known as an inverted yield curve. The development often -- but not always -- presages an economic downturn. The narrowing or flattening of the curve is generating concern on Wall Street and could be painful for small investors.
The issue here is whether foreign banks purchase US treasury bonds or bonds from companies.
The way our government pays for the massive federal deficits of the Bush Administration is to borrow money by selling US Treasury bonds. Since American's dont save or buy treasuries like grandma used to, foreign banks have been stepping in to keep our government afloat. If those foreign banks decide they can get a better return by buying corporate bonds instead of government bonds, well that's the kind of "market correction" Greenspan talked about.
Foreign Investors Chant 'USA, USA' (Corporate Bonds)
November 17, 2005
Overseas investors are pouring their money into U.S. corporate bonds.
Their voracious appetite reflects not only the higher yields offered by U.S. companies but the appeal of their strengthening balance sheets as corporate profits soar.
It is good news for U.S. corporations: All that foreign buying helps keep borrowing costs low for companies, even at a time when short-term interest rates are moving higher as the Federal Reserve continues to tighten monetary policy.
Foreigners were net purchasers of $51 billion in corporate bonds in September -- the second-highest monthly total ever, after June's record $54 billion, according to the Treasury Department. The bond purchases are up 24% for the first three quarters of 2005 from a year earlier and are on pace to make this year the biggest ever for foreign purchases of U.S. corporate debt.
By contrast, foreign net purchases of U.S. Treasury bonds, which rallied again yesterday, have fallen 15% compared with the first nine months of last year. As prices rise, yields fall -- and with Treasury yields still at historically low levels, overseas investors have been drawn increasingly to higher-yielding corporate bonds.
