I think bond investors have proved still complacent up until now. I tend to believe Bernanke when he says that the future course of interest rates is data dependent. The point is that the data, unlike Gransspan's far reaching guidance, is volatile. Volatility means higher risk premiums and that is before we start talking about the chance that the same inflationary expectations that have driven gold would start to leak into bonds.
Quoting the Capital Spectator on the latest FOMC:
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capitalspectator.com
…the notion that 25-basis-point hikes will now arrive like clockwork at each and every FOMC meeting has all but passed into history. In its wake is something different, which is to say that the Federal Reserve is more likely to surprise Mr. Market in the future than at any time since the central bank began elevating the price of money back in June 2004. Granted, if the data permits, the Fed may take a pass on another rate hike. But if the surprises go the other way, something tougher may come in terms of responses, and perhaps faster than you think.
One economist we talked with thinks Bernanke and company believe it's time to take off the kid gloves with the fixed-income set. In fact, the Fed is now prepared to adjust monetary policy to a degree and on a timetable that isn't necessarily obvious to the bond traders who've come to anticipate only modesty and predictability from the central bank. So says Robert Dieli, president and founder of the economic consultancy RDLB Inc., a Lombard, Ill. shop that also runs Mr. Model, an economics web site. More to the point, Diele tells CS that the Fed, if it feels obliged, may hike rates by more than 25-basis-points, and perhaps on a day other than the regularly scheduled FOMC huddle.
"If we get a bad consumer price index report, for instance, the Fed might do something the next day," Diele muses.
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Can you imagine that? Is that already discounted?
I still interpret a rise in bonds on a down day as a knee jerk flight to safety (otherwise known as risk reduction trade). I don’t think it has long term implications for the bond market. Any real wealth exiting either of the assets: bonds, stocks, real estate or commodities is likely to be so burnt that it would be happy to earn short term interest rates for a while and heal.
To me, friday's signal is not about how bonds rose appropriately. It is about how surprisingly stocks fell appropriately. We haven't seen that in a while.
YanivBA |
