Wednesday, August 18, 2010

Long Bond Soaring, Sailors Take Warning!

Over the past couple of months the long-term borrowing costs for the US treasury have been pushing down again, concurrent with increased pessimism about the economy and when the US will emerge from recession/slow growth. In the past few days, the prices of 10 and 30 year treasury bonds have positively surged. At the same time, equity markets have remained fairly stable. What does the divergence between treasury yields and equity prices say about the near future of our economy? One possibility is that the market is now anticipating and pricing in quantitative easing from the Federal Reserve – and so prices of both equities and bonds are rising. Another possibility is that expectations of future inflation are falling, which would lower bond rates, all else equal. A final possibility is that the bond market is signaling another leg down in the economy, and that equity markets are behind the curve. (more)

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