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 todayâ€™s closing rate of 2.2%. As David Wessel notes, thatâ€™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. â€śIf this explanation is true, then the slight uptick in interest rates from such low levels shouldnâ€™t be enough to undermine the nascent housing recovery,â€ť he says. Wessel agrees with Irwin, arguing that â€śmarkets, hungry for more certainty than Fed officials can provide, over-interpret each adverb Fed officials useâ€ť. UBSâ€™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. â€śCentral 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 QEâ€™s working is rising yields.â€ť 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.