Efforts by Federal Reserve Chairman Ben Bernanke to keep consumer-borrowing rates low and revive economic growth are being undermined by volatility in the price of Treasuries. “Volatility has increased dramatically, and it seems to get more each day,” said Thomas Roth, New York-based head of government-bond trading at Dresdner Kleinwort. “A lot of that has to do with uncertainty about whether the Fed will increase purchases of Treasuries. The market is looking for some change in the Fed’s plan.”
Lately, concern about inflation has driven interest rates higher on longer-term government bonds. When interest rates rise, prices on bonds fall. Just a couple of months ago, deflation was the great concern, and I believe that deflation is still the more probable and dangerous direction prices could take. While the U.S. economy seems to be in a bottoming process, and China appears to be growing due to stimulus packages, the rest of the world is experiencing an economic decline on par with the Great Depression (see The world economy is tracking or doing worse than during the Great Depression (update) at Voxeu.org). So while the Fed’s efforts, government stimulus packages and other unprecedented measures may result in inflation in the future, I do not see that as being imminent, but rather in a 3-5 year time period.
What is particularly vexing from an investing standpoint is that the inflation argument and subsequent rise in interest rates is damaging Treasury bond prices, which have been a safe haven for low-risk investors seeking some return while avoiding the volatility of the equity markets.
Bloomberg.com has a full report on this matter here.
Gregg D. Killoren
victoria1014
