Financial Daily from THE HINDU group of publications
Wednesday, Jul 23, 2003
Financial Daily from THE HINDU group of publications Wednesday, Jul 23, 2003 |
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Money & Banking
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Govt Bonds Columns - Financial Scan US bonds in a tailspin S. Balakrishnan
THE Chairman of the US Federal Reserve, Mr Alan Greenspan, was quite upbeat in his testimony to Congress last week. He said economic data was turning positive and foresaw an extended period of growth in the US economy. His estimate for 2004 was a stunning 4 per cent plus — quite a sharp jump on present trends as growth was well below 2 per cent annualised in the first quarter of 2003. Indeed, economists now believe that for unemployment to fall, growth must accelerate significantly from present levels. "More with less" has become the byword in corporate America. Productivity gains enable volumes to increase with the same or smaller workforce. Only if demand picks up significantly is there an inducement to hire and invest. There are few signs yet that this is happening. In his testimony, Mr Greenspan reiterated his commitment to keep rates low. He thought unorthodox measures such as the Fed stepping in to buy bonds were unnecessary and deflation was more of a threat than a serious risk. These remarks roiled the bond market, which tumbled in reaction, sending 10-year yields to 4 per cent. Mr Greenspan was so concerned with the negative effect of his remarks on bonds that he was compelled to beat a hasty retreat the very next day stating that nothing unconventional was off the table, if it became necessary. The stock market is range-bound with the Dow fluctuating narrowly above 9,000 points. Corporate results and outlook are mixed. The rally since the end of the Iraq war has been huge and packed into a short span of time. With such handsome gains in the space of weeks, investors are naturally inclined to pocket some profits. The Nasdaq has had an even better time than the Dow. It has risen from 1,100-1,200 levels to over 1,700. A lot of tech stocks such as Microsoft, Intel and Cisco are back in favour. The fall of the bond market has not stalled despite stocks giving up some gains. It is not amused by the improved chances of a recovery taking hold in the second half — this despite core inflation being flat month-to-month. The fears of mounting Budget deficits and the looming prospect of unfunded social security and pensions in the coming years are also unnerving the bond market. On Monday, the yield on 10-year Treasuries rose to almost 4.2 per cent. The past month has seen a virtual bloodbath in bonds across all maturities. At this level, the 10-year is surely a screaming buy. Another opportunity, as in the early nineties, to ride the steepening yield curve for carry (and easy) profits.
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