The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, September 10, 2010

What do low long-term govt bond yields mean? FT answers

From FT Alphaville:

Stephen Lewis at Monument Securities is trying to rationalise the ultra-low state of government bond yields...Lewis makes this interesting point:

"Neither the Fed nor the Bank of England has trusted to this mechanism to deliver the low long rates they are targeting. This is why they have sought to reinforce downward pressure on longer-term bond yields through their QE operations. Bond yields that are lower than warranted by the fundamentals are, in turn, exerting a downward pull on other market yields, including those on equities.

They are contributing to the relative resilience of equity prices. This support would presumably evaporate if the Fed and the Bank of England were to shift to less interventionist stances with respect to the capital markets.

The danger in a situation where the authorities override the operation of market forces in setting yields on longer-term bonds is that these yields no longer function efficiently as signals in the allocation of capital. It is, indeed, a tacit assumption the authorities are making that, following the crisis, the capital markets’ function is impaired in that, left to themselves, they would not clear at low enough yields. In our next briefing, we shall examine the problems that are likely to arise with this market manipulation."

In other words, you might as well ignore what bond yields are saying, since they’ve become irrelevant due to the level of manipulation. Although, didn’t we always know this is what the central banks were attempting to do?