The Bernanke era (or should we say the era of anticipating the Bernanke era?) is just about 48 hours old, but it seems intent on distinguishing itself from the Greenspan age by rousing the bond market to rethink its formerly dispassionate view of the future. Whether the new-found sobriety among those who trade debt lasts beyond tomorrow is unclear, but for now there’s a new elephant in trading rooms across the country.
At one point today, the 10-year Treasury yield reached nearly 4.60%, the highest since March, and up once again from the previous day’s close of roughly 4.54%. Is this a sign that the fixed-income set coming to terms with the rising inflation of late? Of course, the more topical theory is that Bernanke, for the all the accolades, remains an untested variable in the global economy, and necessarily will remain so for some time.
Uncertainty can be fertile ground for fear. “There is a degree of market uncertainty that he [Bernanke] could be less of an inflation fighter than Greenspan and the fact that he is new and untested,” John McCarthy, director of foreign exchange trading at ING Capital Markets in New York, told Reuters today.
Yes, but bond guru Bill Gross, who manages the largest bond fund at Pimco, today opines in an interview with BusinessWeek that Bernanke’s the “right guy.” In fact, Gross goes one step further by announcing his economically amorous attraction to this right guy. “I like Bernanke better,” the veteran bond manager confesses.
If Bill likes him, what’s the bond market’s worry? As it turns out, Gross is a touch less sanguine than the above quotes suggest. Indeed, take this tidbit from elsewhere in Gross’ analysis of the pending switch at the Fed. “Greenspan’s approach in terms of throwing money at the problem, lowering rates whenever there was a crisis — it appears to have worked,” the man from Pimco explained. “At the same time, it has led to a substantially leveraged U.S. economy. That’s the legacy he leaves Mr. Bernanke.” Cleaning up that legacy, or at least taking a stab at the task at hand, could weigh heavily on the Bernanke era when it begins in earnest on February 1.
It’s been no small benefit to Greenspan’s legacy that U.S. Treasury yields, despite being low on an historical basis, have been substantially higher than competing sovereign debt instruments. That’s helped draw capital into the U.S. that might otherwise look for a higher-yielding home elsewhere, in turn supporting American efforts to fund its budget deficit. That’s kept the applause coming for Greenspan.
Germany’s 10-year bond, for instance, currently yields a relatively light 3.38%, according to Bloomberg. The Treasury yield premium is even more dramatic compared with some Asian governments, starting with Japanese bonds, whose yields look more like a crummy money market rate to the American investor’s eye.
Nothing lasts forever, of course. As Nick Godt of TheStreet.com observes today, an alternative scenario may be approaching in terms of global yield comparisons as Europe and Japan show renewed signs of economic strength and markets prepare for higher yields there. To be sure, U.S. Treasuries still hold a sizeable premium advantage. But what if that advantage was trimmed only slightly but suddenly? Given the delicate balance of perceptions these days, even a small change in relative yields globally could create big changes.
No one will ring a bell when and if such changes arrive. Rather, transformations are more of an evolution than a sudden change. One could argue the evolution is upon us now in all its inglorious and muted intensity.
With that in mind, investors may want to return their gaze to the dollar for clues about what may or may not be coming. After rising for much of the past two months, the U.S. Dollar Index has stalled, and has started turning down, albeit only modestly thus far. Yet there’s clearly been a definite change in momentum for the greenback, as any cursory glance at a chart of the Dollar Index will reveal. “The dollar licks its wounds in the aftermath of Tuesday’s double blow of slumping consumer confidence in the U.S. and higher than expected business confidence in Germany,” Ashraf Laidi, currency strategist at MG Financial Group, writes today for ForexNews.com.
Is this the latest evolutionary signal that the forex market’s getting nervous again about prospects for the buck? If so, what does this imply for bonds?
Let’s be fair: the odds of Germany suddenly transforming itself into an economic thunderbolt are something more than remote at the moment. Then again, how many expected Japan to make the economic progress it has in the last 12 to 18 months?
On that note, it’s worth noting that in the foreign exchange world, there are questions surrounding who Bernanke is, what he’ll do (or not do), and how the global economy and financial markets will react. That’s creating anxiety, suggests an AFX story today via FXstreet.com. The article quotes a Bridgewater Associates research note, which advises, “With the current imbalances in the U.S. economy, Bernanke will be walking into a minefield…”
And the poor guy isn’t even Fed chairman yet.