Counterparties: Bruised bonds

May 31, 2013

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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.

Goldman Sachs, on the other hand, says, “the bond sell-off: It’s for real,” and expects rates to hit 2.5% by the end of the year. BofA agrees, warning that “risks of a bond crash are high”.

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:

Wall St. boot camp: $1,000 a day to learn the difference between a pivot table and a header row – DealBook

Tax Arcana
How Apple’s multi-billion dollar “check the box” tax loophole snuck through Congress – Reuters

No, you probably didn’t predict the financial crisis – Noah Smith

EU Mess
Thousands of “Blockupy” activists protest austerity, as European joblessness hits a new record – Guardian

The government settled a big case with Citigroup – so why are the terms confidential? – Jonathan Weil

Unintended Consequences
The uneven, perplexing market for mobile money in Africa – Bloomberg Businesssweek

“The Treasury market is a beach ball being held under water” and other ways of looking at the recent bond market plunge – WSJ
Emerging market currencies are getting crushed – WSJ

The “Society of [Google] Glass Enthusiasts” is exactly as strange as you thought it would be – Bianca Bosker

Nordic Models
How Sweden partially finances college costs and leaves student with manageable debt – Matthew Phillips

Year-over-year core inflation is at the lowest level on record – Catherine Rampell

The USSR’s old domain name is a virtual haven for criminals – AP

Bloomberg’s CEO is upset he can’t hold Matt Winkler accountable for the spying scandal – NY Post

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

New Normal
Once again, the US consumer is expected to save the economy – Sober Look

Goldman Sachs gets 17,000 applications for 350 intern spots – WSJ

And, of course, there are many more links at Counterparties.


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