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“There is little doubt that, with the breakup of the Soviet Union and the integration of China and India into the global trading market, more of the world’s productive capacity is being tapped to satisfy global demands for goods and services. Concurrently, greater integration of financial markets has meant that a larger share of the world’s pool of savings is being deployed in cross-border financing of investment. The favorable inflation performance across a broad range of countries resulting from enlarged global goods, services and financial capacity has doubtless contributed to expectations of lower inflation in the years ahead and lower inflation risk premiums. But none of this is new and hence it is difficult to attribute the long-term interest rate declines of the last nine months to glacially increasing globalization. For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.” – Alan Greenspan – 2/16/2005
Last year, while bond market mavens and economists collectively decreed an end of the low yield and rate environment we have swam in over the past thirty years, a simple panoramic observation of trend, symmetry and proportion – trumped a more nuanced and fundamental understanding of a market given to such lofty descriptions as fixed income and smaaht money. While it would be foolish to completely dismiss the effects of current monetary policy or the economic backdrop against which the Treasury market trades, the gestalt laws of perception appear to hold more weight on the market when one considers the totality of the cycle, versus the immediate structural disposition.
Life is not complex. We are complex. Life is simple, and the simple thing is the right thing. – Oscar Wilde
While we wait on yet another unified or conspiracy theory to explain why yields are so low today – or why they are poised to rise tomorrow, we would simply urge consideration of the relative symmetry and balance expressed in the long-term yield cycle – keeping in mind the words of wisdom of Wilde and Newton. In as much as conventional wisdom perceives a prospective sharp turn in the over 30 year bond market bull, the lengthy historic record of its market cycles paint a much different picture and one most participants have yet to even consider. As pointed out by the maestro himself – the world is indeed Friedman flat. It should be interesting to see how after the Treasury market stabilizes we collectively adapt to a long-term yield environment that may flatten considerably as well.
“Although we understand Draghi’s contractual agreements with jawboning the currency lower when he can, the truth is its effects are short-lived and the eventual breakout – should it come, more severe as the short-base grows increasingly entrenched.” – Puff the Magic Draghi