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| Greenspan says markets signalling weakness |
| 2005-06-07 |
| Alan Greenspan, Federal Reserve chairman, on Monday night highlighted the unusual behaviour of global bond markets, and acknowledged that investors might be correctly signalling a period of economic weakness ahead. Mr Greenspan, in remarks prepared for delivery via satellite to a conference in China, pointed to the "unusual behaviour" of market-determined long-term interest rates. Since last June, the US central bank has raised short-term interest rates from 1 per cent to 3 per cent but the yield on the 10-year Treasury note has declined by about 80 basis points to just under 4 per cent. Emerging market bond spreads have fallen to low levels, and the spread of investment grade corporate bonds and junk bonds over Treasury bonds has declined. "The economic and financial world is changing in ways that we still do not fully comprehend," Mr Greenspan said. this is the key point - for a variety of reasons ranging from the Internet and 24 hour computerized trading to globalization of goods trading - not to mention geopolitics - there are changes going on that the central banks don't understand and can't necessarily control well. Some analysts have suggested the market signal meant the Federal Reserve would soon end its interest rate tightening cycle. Mr Greenspan acknowledged that "policymakers need to be able to rely more on the markets' self-adjusting prices and less on officials' uncertain forecasting capabilities". Mr Greenspan said: "One prominent hypothesis is that the markets are signalling economic weakness. This is certainly a credible notion." But he added that there was no fully satisfying explanation for such low long-term rates, which are a worldwide phenomenon and which have been insensitive to signs of strength in the global economy. Foreign central bank purchases of US Treasuries was part of the explanation, but the overall impact had probably been "modest", and could not explain the drop in long-term rates over the past year around the world, he said. Similarly, global competition and the rise of China and India had contributed to lower inflation pressures, but could not account for the fall in rates. Previously Mr Greenspan has referred to the "conundrum" of low long-term interest rates. Some analysts suggest that privately Mr Greenspan sees rates as too low at a time when the Fed sees the US economic fundamentals as healthy and inflation risks as the greatest concern. Very low long-term rates had contributed to speculative activity by investors searching for yield, including possibly excessive flows into hedge funds and private equity funds, that was likely to result in diminishing investment returns, he said. "After its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy," he said, adding that sensible risk-management by banks and other financial institutions meant there should not be systemic problems. |
| Posted by:too true |
| #3 Shipman is right. The reason longer maturity bonds etc., traditionally have higher interest rates is more time = increased risk (not only of inflation). Essentially the market is saying we see no future risks or at least we see future risks declining over time. What seems to be happening is excess liquidity is chasing returns and bidding down future risks to zero (which is what I think Greenspan is saying here - policymakers need to be able to rely more on the markets' self-adjusting prices). Only time will tell if they are right. |
| Posted by: phil_b 2005-06-07 18:10 |
| #2 oooh oooh! Me! Pick me! |
| Posted by: Frank G 2005-06-07 17:04 |
| #1 Surplus capital formation. Too much capital chasing too few investment opportunities. |
| Posted by: Shipman 2005-06-07 16:29 |