Thursday, July 8, 2010

Do Falling Bond Rates Stimulate the Economy?

The bond market remains the only game in town when it comes to stimulating the U.S. economy.

-David Rosenberg, Breakfast with Dave today

Yes, interest rates on Treasuries have fallen. So what does this mean? The next time I or a bank buys a newly issued Treasury, we will receive less income each year on our purchase, and that same principal has been transferred from my pocket or the bank to be spent not by me and not loaned by the bank, but rather to be spent by the government. The only certainty is my or the bank's lower income from said bond purchase. How is that stimulatory?

Yes, lower interest rates make home purchases more affordable to the buyer, but those same lower rates are reflected in higher selling prices, so that's more or less a wash; and it is the sated housing market and resultant sluggish new home sales and resale pace that itself allows the current multi-decade low mortgage rates to even exist.

So, granted that Dr. Rosenberg is at the top of his profession and I am not an economist at all, I would question this statement.

Right now, on the Japa-Grecian scale, the U. S. is trending Japanese. There is no debt rollover problem this week. But this is a duality. The U. S. is rolling over massive amounts of Treasury securities. The conventional wisdom is that the bond/CDS vigilantes will move pokily along from Spain currently to Portugal and maybe the U. K., and eventually make their way to the U. S. should current budgetary and economic trends continue.

Thus I have been lightening up on a bond-heavy portfolio which was put in place beginning in summer 2007. The powers that be are going to stimulate if necessary. You can count on it, just as you can count on a doctor to do everything he/she knows to keep a patient alive and healthy absent a "do not resuscitate" order. So either the pace of economic activity picks up sooner rather than later, or the authorities will do something that in their view prevents another Depression/brings growth back.

As stated here, there was growth in the spring, but the latest statistics show it waning.

Treasuries are for traders or very long-term holders now; stocks remain for gamblers and the stock market is probably truly a stock-picker's market for the long haul specifically given that wheat and chaff are tending to move together on a day-to-day basis; cash is trash; and precious metals are having their typical seasonal summer weakness. I expect that unless and until the Federal Government gets serious about fiscal discipline, the ballooning debt obligations will induce more and more Americans to hedge their bets with ownership of precious metals, just as they did in the 1970's.

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1 comment:

  1. Would not a lower bond yield suggest individuals would be more willing to use thier cash and make purchases today, rather than investing in the low yielding bond market?