Monday, December 12, 2005

The Yield Curve?

There has been much market comment about the current flat yield curve in U.S. fixed income markets. With the benefit of absolutely no specialized knowledge, Eyes Not Sold tackles the subject. Market commentators, pundits and pretenders alike, have explained that huge and growing cash reserves in foreign central banks and multinational corporations are being invested in U.S. securities, attracted by the deepest, most liquid, and perhaps most transparent capital market in the world. A recent Fed paper apparently estimated that foreign buying has created a drag on long term yields estimated at 150 basis points. But Eyes Not Sold has been under the impression that financial market prices were the result not of supply/demand but of economic value. Of course supply/demand is important in the short term, but investors, as opposed to traders, presumably try to understand the economic value of any security, because economic value is expected to ultimately prevail. Right? So it's a given I guess that the U.S. has become the world's money market account, but what draws this savings glut in a way that creates the current curve? ...Next


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