Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Strange Things Afoot in the Bond MarketFrom Bloomberg:Bond Bears Dumping Two-Year Treasuries Defy History (Update3) By Oliver Biggadike and Daniel Kruger Aug. 24 (Bloomberg) Bond investors that drove two-year Treasuries down on Aug. 21 by the most since early June after Federal Reserve Chairman Ben S. Bernanke said the economy is "beginning to emerge" from recession may find themselves wishing they had held onto the securities. While the comments sparked speculation that the central bank may soon raise borrowing costs as growth resumes, history shows the Fed is likely to keep its benchmark interest rate at a record low for a year or more. Policy makers didn’t boost rates after the 2001 recession until 12 months into the recovery, while it was 17 months following the 1991 economic contraction. "It's going to be very difficult for the Federal Reserve to raise rates simply because there's no inflation," said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. "The two-year at a yield of 1 percent is an excellent yield," said Cheah, who has been buying the securities. The yield on the benchmark two-year note rose almost 11 basis points at the end of last week, or 0.11 percentage point, to 1.1 percent, according to BGCantor Market Data. That was the most since it surged by the same amount on June 8. The slump came after the National Association of Realtors said sales of existing U.S. homes jumped 7.2 percent to a 5.24 million annual rate, the most since August 2007, and Bernanke said at a Fed-hosted central bankers' symposium in Jackson Hole, Wyoming, that "prospects for a return to growth in the near term appear good." Speculative Positions Trading positions show that last week's sell-off may be short-lived, even as the government prepares to sell $109 billion of Treasury notes this week, including $42 billion of two-year securities. The benchmark two-year note rose today, with yields falling three basis points to 1.06 percent. Speculative long positions on two-year notes, or bets prices will rise, outnumbered short positions by 158,041 contracts on the Chicago Board of Trade last week, the most since Dec. 7, 2007. That was just before the securities, which are more sensitive to changes in Fed policy than longer-term debt, posted their biggest quarterly gain since 2001, returning 3.26 percent, Merrill Lynch & Co. indexes show. Read the rest of the article Labels: Ben Bernanke, bond market, Monetary Policy, speculation, Treasury bonds, yield curve Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
