Eurodollar University: The Essential Business Of Decoding Curves

It was the most common catchphrase of 2017, interest rates have nowhere to go but up. Maybe it was doomed from the start given that Alan Greenspan was among the more prominent commentators expressing this view. In his mind, the bond market was in a bubble and the party was already over.

His successors at the Fed, following in his footsteps, had heroically vanquished the negative factors still lingering after a Great “Recession” nobody could have seen coming. Success at long last, total and complete vindication for monetary policy and econometrics.

In July 2017, the “maestro” said:

By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.

I don’t know if this was the first time it had been suggested this time around, but it was among the first explicitly stating that the bond market was “mispriced.” That’s what he meant when he said: “not discounted in the marketplace”. The bond market was ignoring, allegedly, all the non-stop good information about the economy. Apparently, bond investors couldn’t hear the words: globally synchronized growth.

Given where we are now, and it isn’t the better, later stages of globally synchronized growth, perhaps bondholders could hear the words and figured they were nothing more than a hollow marketing slogan rather than a realistic assessment of global economic conditions?

The bond market is more keenly aware of monetary factors and therefore liquidity risks than Greenspan would ever give it credit for. It’s curious as to why, though, given that bond and money curves have been right about things in every instance where Economists like Alan Greenspan have been wrong.

It almost seems personal at this point, and therefore irrational not exuberance but psychotherapy. Nobody on the mainstream side appears able to answer for bond “demand”, as one big bank Economist demonstrated also in the middle of 2017.

Chadha, the chief global strategist at Deutsche Bank’s U.S. securities unit, is part of a group of die-hard bond bears who say Treasuries have become unhinged from reality and yields have nowhere to go but up. Like many before him, he points to all the obvious signs investors seem to be ignoring: higher benchmark interest rates, wage pressures that will lead to faster inflation, worsening budget deficits that will result in more debt issuance.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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