Financial Times Editorial - Rising US bond yields
Rising US bond yields
Published: April 12 2006 03:00 | Last updated: April 12 2006 03:00. Copyright by The Financial Times
Last Friday long-term US interest rates rose through the psychological threshold of 5 per cent. This coincided with a fall in the US jobless rate in March from 4.8 per cent to 4.7 per cent. Some observers interpreted the two events as a portent of further monetary tightening, having previously anticipated the Federal Reserve would bring its current phase to a close at its next meeting in May. Higher long-term yields might presage market fears of rising prices after years of subdued inflation.
These anxieties are overdone. Any signs of significant labour market tightening should show up in rising wages. Yet growth in average US hourly earnings actually dipped slightly to an annualised 3.4 per cent in March from 3.5 per cent in February. Nor do yields on US index-linked bonds raise any alarms. If the market was expecting a rise in the long-term inflation outlook, the spread between the yield on inflation index-linked Treasury bonds - Tips - and on conventional bonds ought to be widening. In the past three months the 20-year Treasury spread over Tips has barely shifted.
The explanation for the US long-bond sell-off is likelier to be found in broader global monetary trends than in mixed signals from short-term US data. In the past six weeks the US 30-year bond has risen by more than 50 basis points - a more than 10 per cent rise in the yield. This has been tracked by broadly equivalent increases in German, UK and Japanese government yields, indicating the prospect of further monetary tightening in all the main industrialised economies. That spreads between US long bonds and other government benchmarks have not widened suggests that foreign investors have not been selling US Treasuries because of concerns over the dollar exchange rate risk.
It does not follow that the global era of low long-term interest rates is drawing to a close. There are reasons to think the bond market conundrum (highlighted by Alan Greenspan, the former Fed chairman) of falling long- yields amid rising short-term interest rates is unwinding. Gross domestic product growth is picking up in Japan and Europe. And global commodity prices have risen as sharply in recent weeks as bond prices have fallen. It is natural for short-term interest rates to pick up at a time of rising capacity utilisation in the leading economies.
Yet, as recently argued by Ben Bernanke, Mr Greenspan's successor, the key influences that have kept long-term interest rates so low for so long are still in place. In the next few years the "global savings glut" - the surplus of emerging market savings over desired investment - will probably diminish as investment opportunities pick up outside the US. But there are other forces, such as strong demand by America's retiring baby boomers for long-term securities, that will persist. America's long bond yield is rising. But it does not look like the end of an era.
Published: April 12 2006 03:00 | Last updated: April 12 2006 03:00. Copyright by The Financial Times
Last Friday long-term US interest rates rose through the psychological threshold of 5 per cent. This coincided with a fall in the US jobless rate in March from 4.8 per cent to 4.7 per cent. Some observers interpreted the two events as a portent of further monetary tightening, having previously anticipated the Federal Reserve would bring its current phase to a close at its next meeting in May. Higher long-term yields might presage market fears of rising prices after years of subdued inflation.
These anxieties are overdone. Any signs of significant labour market tightening should show up in rising wages. Yet growth in average US hourly earnings actually dipped slightly to an annualised 3.4 per cent in March from 3.5 per cent in February. Nor do yields on US index-linked bonds raise any alarms. If the market was expecting a rise in the long-term inflation outlook, the spread between the yield on inflation index-linked Treasury bonds - Tips - and on conventional bonds ought to be widening. In the past three months the 20-year Treasury spread over Tips has barely shifted.
The explanation for the US long-bond sell-off is likelier to be found in broader global monetary trends than in mixed signals from short-term US data. In the past six weeks the US 30-year bond has risen by more than 50 basis points - a more than 10 per cent rise in the yield. This has been tracked by broadly equivalent increases in German, UK and Japanese government yields, indicating the prospect of further monetary tightening in all the main industrialised economies. That spreads between US long bonds and other government benchmarks have not widened suggests that foreign investors have not been selling US Treasuries because of concerns over the dollar exchange rate risk.
It does not follow that the global era of low long-term interest rates is drawing to a close. There are reasons to think the bond market conundrum (highlighted by Alan Greenspan, the former Fed chairman) of falling long- yields amid rising short-term interest rates is unwinding. Gross domestic product growth is picking up in Japan and Europe. And global commodity prices have risen as sharply in recent weeks as bond prices have fallen. It is natural for short-term interest rates to pick up at a time of rising capacity utilisation in the leading economies.
Yet, as recently argued by Ben Bernanke, Mr Greenspan's successor, the key influences that have kept long-term interest rates so low for so long are still in place. In the next few years the "global savings glut" - the surplus of emerging market savings over desired investment - will probably diminish as investment opportunities pick up outside the US. But there are other forces, such as strong demand by America's retiring baby boomers for long-term securities, that will persist. America's long bond yield is rising. But it does not look like the end of an era.
posted by Carlos T Mock at 7:34 PM
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