2010-12-16

Global rate hikes

Yesterday I wondered if the rising Treasury interest rates were a response to QE2 or the return of bond vigilantes. There's another explanation, which is that there's a global move out of sovereign debt. From John Mauldin's weekly letter, this week titled "Unintended Consequences."
"In meetings today we speculated that the sell-off is not a US-only phenomenon. We speculated that it is more than a reaction to Bernanke's QE2. If all benchmark 10-year debt is selling off by about the same amount in price change, could it be that this selling is the reallocation of globally indexed funds away from sovereign debt and into something else?

"Think of yourself as a Persian Gulf fund. You usually hold foreign sovereign debt in proportion to an index or benchmark. Now you want to reduce your exposure to some of the countries in the index. You either have to sell proportionately from all of the countries in the index or you will face a concentration that violates your index or benchmark. Worldwide sell-off in benchmark sovereign debt suggests this reallocation is underway. Otherwise, how can you account for the Japanese government bond, the German Bund, and the US Treasury note all moving in a correlated way?"

I think that is part of it. I also think that investors and non-core central banks (those in the emerging world especially) are asking themselves about the wisdom of holding sovereign debt in currencies that are either in trouble (the euro) or have central banks that are printing money (the US, UK, and Japan). Couple that with the US having just done a tax compromise that is one huge stimulus bill, on top of extending the tax cuts, and it is enough to make investors consider the wisdom of holding longer-term debt at low rates.
Unless the price of gold and silver begin to surge higher, this is not a sign of inflation, but deflation. Higher rates mean governments will hit their maximum debt levels much sooner...

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