Sunday, May 31, 2009

End of the Secular Bond Bull market?

I've been talking for a while about the 2 scenarios possible for the economy, deflation and inflation. We're moving towards the inflection point of sovereign default or private default. The people are saying private default. They can't shoulder the burden of private debt any longer, evidenced by foreclosures and bankruptcies. The government and the Fed are saying sovereign default by guaranteeing trash assets, pumping $500 billion into the FDIC, and generally spending money they don't have. The bond market does not like the government saying they will debase the currency as evidenced in this Bloomberg article.

Bond Vigilantes

‘It’s Over’

Inflation expectations may best be reflected in the yield curve, or the difference between short- and long-term Treasury rates. The gap widened this week to 2.76 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003. Investors typically demand higher yields on longer-maturity debt when inflation, which erodes the value of fixed-income payments, accelerates.

“The yield spreads opening up imply that inflation premiums are rising,” said former Fed Chairman Alan Greenspan in a telephone interview from Washington on May 22. “If we try to do too much, too soon, we will end up with higher real long- term interest rates which will thwart the economic recovery.”

Other economists are more pointed. After falling from 16 percent in the early 1980s, 10-year yields have nowhere to go but up, according to Richard Hoey, the New York-based chief economist at Bank of New York Mellon Corp.

“The secular bull market in Treasury bonds is over,” Hoey said in a Bloomberg Television interview. “It ran a good 28 years. They’re never going lower. That’s it. It’s over.”

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