Counterparties: Bruised bonds
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With Federal Reserve chairman Ben Bernanke hinting that the US central bank may be getting ready to cut back on its bond-buying program, the bond market has been beaten up. The yield on the benchmark 10-year Treasury note rose dramatically this month, from 1.63% at the beginning of May to today’s closing rate of 2.2%. As David Wessel notes, that’s the biggest monthly move in three years. Optimists see this as a sign of economic growth, while bond investors are worried about their books, warning of an impending crash.
Neil Irwin explains that higher rates may be a sign of increasing confidence in economic growth. “If this explanation is true, then the slight uptick in interest rates from such low levels shouldn’t be enough to undermine the nascent housing recovery,” he says. Wessel agrees with Irwin, arguing that “markets, hungry for more certainty than Fed officials can provide, over-interpret each adverb Fed officials use”. UBS’s head of global rates strategy put out a note today which hypothesized that the market is overreacting to rumors about QE, concluding that bonds are cheap.
Either way, argues Alen Mattich, the Fed is in a Catch-22 situation. “Central banks argue that their bond purchases are meant to push down yields in order to make long term finance cheaper. But, at the same time, a sign that QE’s working is rising yields.” The trick, then, is to figure out how to keep rising yields from slowing growth. — Shane Ferro
On to today’s links:
Morgan Stanley really wanted to shrink its derivatives business – until it found 3 big deals – Bloomberg
Running one of the worst-performing US food makers nets Smithfield’s top 5 execs $85 million – Bloomberg
And, of course, there are many more links at Counterparties.