Monday, December 12, 2005

The Yield Curve? continued

So to continue, why are investors, especially the not so marginal foreign investors, choosing to sign up for 10 years at 4.5% instead of preserving liquidity and price stability at much shorter maturities. Could it be any or all of the following: a premium paid for the relative safety and stability of U.S. markets; a recognition by major trading partners of their economic dependence on the health of the U.S. economy and consumer or, in other words, reinvestment in the source of their wealth; a statement about the lack of confidence in global investment alternatives, especially in equity markets; a market that is portending, over time, global deflation, despite or perhaps related to the rise in commodity prices; a market that has been prescient enough to anticipate the strength of the dollar in 2005. Eyes Not Sold does not know. But each of these reasons is, whether right or wrong, tradeable.

But what if the current yield curve is the result primarily of the search for any yield advantage, with that search presumed to be safest in the most liquid market. What if the migration of trading technology, trading skills, and hedging products over the last 10 years to China and other major trading partners has led to a belief that the risk can always be managed by the smart and the swift. What if that Fed referenced 150 basis point gap(prior post) happens in one week and not gradually. LTCM on a global scale? Eyes Not Sold does not know, but as long as some at the Fed and other market pros use the word "conundrum" in describing the yield curve today, WELL, WHO KNOWS?


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