You’ve seen the scary charts showing just how bad the Fed’s policy of quantitative easing has failed. Although it would love to push long-term interest rates down to 4%, the market was having none of it. And the general consensus is that the uber-steep yield curve is a big nyet vote on both fiscal and monetary policy.
Tim Bond, an analyst at Barclays, says hogwash, taking the Geithner view that the rally in yields is the predictable response to both a recovering economy and the dissipation of the panic premium in US-denominated assets that built up during the bubble. The full report is embedded below (via FT Alphaville). Here’s the introduction:
In the financial markets, interpretation often counts for more than fact. Indeed, after
passing through the qualitative and emotional analytical filter, factual inputs can often
emerge from the process as anti-facts. At present, many market participants still
appear to be afflicted by the mood of depressive pessimism that became pervasive last
year. Under this condition, market developments and economic data-points that an
impartial analysis would usually construe as positive are being warped into negative
signals. Signs of an economic recovery, somehow, end up being interpreted as signs of
impending economic doom.
Nowhere is this truer than of the prevailing fuss about the dollar and US treasury yields.
Both asset classes have been losing the save haven and liquidity premiums established
during the market carnage of last year. This is an unambiguously positive development,
confirming a revival in risk appetites, decreased fears about the financial system and a
general improvement in economic expectations. However, after passing through the
prevailing interpretative filter, these positives become negatives. Rather than indicating
an economic recovery, the lower dollar and higher bond yields apparently reflect a crisis
of confidence in US Inc, investors fleeing the prospect of endless budget deficits, a
towering government debt burden and prospective hyperinflation.
Never mind the rather obvious objection that the violent rally in Cable specifically
contradicts this theory – unless of course one assume s that jumping out of the frying
pan into the fire is a rational approach to securing a safe haven. Equally, never mind the
other rather obvious point that the currency of the largest creditor nation – Japan – has
recently been depreciating against the dollar, a development that is not exactly
indicative of rising concerns about US borrowing. Rather, if one starts from the premise
that nothing good is happening in the global economy, any contrary empirical
indications must inevitably be re-interpreted to fit the premise. The current rumblings
of discontent smack more of the avoidance of cognitive dissonance on the part of
inveterate bears, than any dispassionate analysis of the situation.