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How the Bond Markets React The fixed income market has had its share of Chicken Little's of late especially when it comes to people like myself who warn that the current debt and the cost of its continued sale is harmful to the economy in not only the short term, but the long as well. Those customers, fortunately for us, are hungry for yield even if it is beginning to wane.
While this is not necessarily good for Treasuries with over $1.7 billion in new offerings hitting the market on an average day, it has proven good for the corporate market offerings in fixed income. Even as regulators close in on corporate giants like Marsh and GM, foreign investors seem nonplussed. It might make you wonder why unless you were them.
Many of the regulatory investigations conducted against these companies are not necessarily bad for the company in general. In many cases it increases the spread which overseas investors see in this asset class as favorable. It is all about risk even outside these "hunted" sectors.
This adventure outside the relative safety of low yielding offerings such as Treasuries could prove troublesome. The decline in interest in these notes, while noticeable is hardly catastrophic - just yet.
It is important to note for those who are still unsure what the Asian and overseas mentality is behind the purchase of U.S. debt can be summed up in a simple reality. They have yield targets. These targets are fixed and the chase for higher yield,
lower rates bond offerings is a noteworthy change. These investors have been willingly financing our deficits which include everything for the financing of the war to the tax cuts you received last year.
That still doesn't answer the question of why the sudden disillusionment with our debt. Aside from a cultural disdain for our lack of saving, the way we determine the price index for these bonds may also enter into the equation. These securities, which, if calculated incorrectly has led to a higher price and as a result, a lower yield that deserved. This cautionary note was echoed by Bill Gross, the bond chieftain of international renown, who suggested that because of this poorly measured index, we were turning investors to other countries unnecessarily.
But is the way inflation calculated that important to the fixed income markets? In Britain, they changed the way inflation was calculated using a year over year basis tied to a consumer price index called the EuroStats. In effect what happened was the shearing off of the supposed rate of inflation by over half. The result of this was, well, nothing happened.
So is inflation important in bond pricing? Apparently not. So if not, what is pushing bond prices lower and yields higher enough to turn investors to other markets? It seems that it is still geopolitical concerns and poor fiscal policy at home that is beginning to worry a bunch whose signature is overactive concern. So even as we think there is nothing wrong with our full faith in the credit of the United States, the signs are pointing towards an international perception that risk is worth taking - just not the risk we are offering.
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