Permanent Value

Week in Review 8/19/13

Bruce Doole
August 19th, 2013


Yields on longer-term global government bonds rose sharply in the second quarter. For example, yields on US Treasury notes lurched higher by nearly 100 basis points. This is surprising—and, to steal Mr. Bernanke’s word for it—a bit “puzzling.” “Puzzling” because the fundamental economic views on the state of the world have not changed as dramatically as interest rate fluctuations suggest. In our view, the key macroeconomic determinants of long-term interest rates, including economic growth and inflation do not point to significantly higher interest rates in the near-term. In fact, as measured by consumer price indices, inflation fell on a global basis during the quarter. Perhaps market participants were a little too gloomy about the prospects for economic growth in late April and early May (when yields on 10-year Treasuries reached 1.62%) and a little too hasty in positioning for a Federal Reserve (Fed) “tapering” in June. We think the interest rate fundamentals point to relatively low longer-term interest rates that rise only gradually as the global economy heals.

The Fed begins to reduce the monthly pace of its asset purchases (“QE”) in the fall, but the complete cessation of Fed buying takes a little longer than the current market consensus believes due to the moderate growth and inflation backdrop. Ten-year US Treasuries remain volatile with a center of gravity around 2.5%. In the euro area, with no major peripheral flare ups, German yields follow the lead of US Treasury yields.


Source: Payden Mutual Funds