LONDON (Dow Jones)--Government bond markets yesterday enjoyed some respite from the pressures that have sent yields surging over the past two months. So far today, however, there has been no follow-through on the recovery.
Policymakers are reported to be puzzled why government securities have put in such weak performances recently. After all, the Federal Reserve and the Bank of England initiated purchase programmes, in Treasuries and gilt-edged securities respectively, that might have been expected to hold down yields on these assets.
The paradox is that almost as soon as the central bank purchases began, government yields started to escalate.
Central bankers entertain three broad explanations for the collapse in government bonds. Investors could be feeling more confident that economic growth will soon resume; the 'safe-haven' appeal of government securities could, therefore, be less than it was when the decline in economic activity was at its steepest. If this were the major influence on bonds, policymakers would be content to see the rise in yields as marking the success of their confidence-building measures.
A second possibility is that investors are worried that central banks and finance ministries have engaged in reflationary 'overkill' in seeking to counter the economic downturn. They may well fear the result of actions taken during the downturn will be that the general price-level rises more sharply over the longer term than it otherwise would have done.
Finally, it could be that investors are anxious that the huge government deficits generated during the slump will be allowed to continue even after economic conditions improve. The result then might be that confidence in government debt and the financial system will collapse.
Thursday, June 4, 2009
The Debts of the Spenders: Central Bankers Confused on Rising Bond Yields
Oh, this is rich. Emphasis my own.
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