Not one in a thousand media commentators recognize that the big-bang bond sell-off in the United States is actually an international phenomenon, one that signifies the potential for an economic growth recovery throughout the world.
The price of the bellwether 10-year Treasury bond has come crashing down since mid-June as the bond yield, or interest rate on the bond, has increased about 1.25 percent. Some observers believe this is the worst Treasury slump since 1987.
But other big nations have experienced a similar bond slump. In Britain, the rate on the 10-year gilt has increased well over a half percent. In Germany, bund yields have jumped almost exactly the same. And in Japan, the yield on the 10-year JGB has risen about a half percent.
But the mirror image of the worldwide bond slump is the global stock market rally.
From the lows of March 12, the German Dax has risen from the ashes by 54 percent. Britain's FT 100 index is up 27 percent, and Japan's Nikkei 225 is up 20 percent. At home, the S&P 500 is up 22 percent.
And why have people been selling bonds and buying stocks worldwide? They are anticipating recovery in global profits and economic growth. Bonds outperform during recessions, while stocks are the play in recoveries.
Of course, special situations apply to every nation -- we're no different. Hedging activity in the widely traded mortgage-backed bond market in the United States causes Treasury rates to overshoot on the way up or down. But no other nation has such a highly developed mortgage-backed bond market. Also in the United States, Federal Reserve chairman Alan Greenspan misled bond dealers with the false promise that the central bank would scoop up a large volume of 10-year Treasuries as a way of pumping cash into the economy. Bond traders stocked up on this news but soon found themselves overinventoried in a plummeting market.
But the big picture is more important. The prospect of growth is beginning to replace recessionary pessimism almost everywhere. Continued... |