Yesterday I castigated the AFR’s Jonathon Shapiro for what I saw as a weakly reasoned article on US bonds. A few hay-makers were thrown in the process and last night I got as good as I’d given as Jonathon entered the MB fight club.
Having punched ourselves to a standstill I apologised to Jonathon for overdoing it and offered him the chance for riposte. Find it below:
Leaving the personal attacks to one side. I fail to see how the AFR is so ‘wrong’ on bonds in this commentary, if wrong at all.
First of all, with any market move, while some factors dominate more than others, there are always several fundamental and technical contributors.
The fact that bond yields have reacted modestly to significant withdrawals of support – is an issue of debate in the bond market – and a surprise to many – so its rich to imply there is a clear right or wrong answer as to which forces are at play in the bond market.
Some of the reasons offered up are as I presented a) the market is reserving judgement on the strength of the US, and by extension global, recovery b) there is still a safe-haven bid c) there is waning appetite to bet against bonds by shorting them and d) there are still vestiges of the carry trade are sound. They may not be the dominant factors but they are factors nonetheless that have maintained support for the bond market.
Regardless they arose from a conversation with arguably the most experienced bond strategist in the country who talks to investors and observes flows every day. I’m inclined to take his opinions on board.
H&H suggests that there has actually been a sell-off in short-term bonds. I am well aware of the rise in short-term yields. I wrote this several times, including in early January that suggested the market’s attention would switch from the 10-year part of the curve to the “belly” at five years as the timing of the first rate-hike became a point of speculation.
The recent short-term moves have been noticeable, but given the circumstances and the gravity of Janet Yellen’s recent comments, they have actually been “relatively” well behaved. In the last six months the 2-year bond rate and the 5-year bond rate have actually been higher than they were as of Friday. They are still low.
Finally, H&H says the main point of my delusion is that I fail to appreciate that the reason bond yields are low is straightforward –and that it pertains to no inflation in the US, Europe or China. That’s his view but I don’t think its straightforward given the rising expectations of global growth and the persistent predictions that there is only one way for yields.
In any case, he may find, if he chose to comment on the entire article, that we are not in total disagreement. My final and main point is that there has been an adjustment in the “neutral rate” where the Fed, and other central bankers, consider to be neither tight nor accommodative. The point I tried to make is that central banks are considering that in an era of structurally lower growth and inflation, the neutral setting is much lower than it was in the past, so when interest rates rise to more neutral setting, bond yields won’t rise as much as might have previously thought.
All in all I fail to see how this is so “wrong”. And I absolutely fail to see how commentary on why yields aren’t rising shows “short-coming of he-said, she-said journalism”. Like the repeated and until now “wrong” predictions on the demise of the bond market, this has been greatly exaggerated!
