Why in the Name of the Good One, from Victor Niederhoffer
Why in the name of the good one, should bonds be going down on news that the taper will be reduced by 25%. By how much are interest rates affected by an additional 25 billion of liquidity a quarter or so. None of my books on liquidity preference versus expectations seem to think it should be anything like it is. What a tendency to supine submission we mortals have.
Tyler Cowen writes:
That is exactly my feeling. I have been asking this question for about two months now and nobody has a good answer for me…
It's as if only the current flow matter and the stock of liquid assets somehow fades into irrelevance. Strange.
Rocky Humbert writes:
Excuse me, gentlemen, But can either of you please explain the raisson d'etre for any investor (i.e. someone who buys and holds to maturity) to have purchased a 10 Year TIP at a non-trivial negative real yield — and which has been the case since QE started in earnest.
I submit that your perceptions of befuddlement may be due to price anchoring/recency bias — and that a previous dislocation due to fed interventions is finally being corrected. Investors are now sensibly demanding a positive real return on their fixed income investments. Sensible, unless we are in a persistent deflation. But if a persistent deflation is in the card, the stock market's nominal earnings expectations are horribly wrong.
I further note that bank CD rates are not rising with market rates. To me, this is a potentially ominous conundrum with the following potential explanations: (1) There's little demand for loans. (2) Bank capital rules are limiting their purchase of marketable securities. (3) Banks are funding their loans with overnight excess reserves. (4) Volker rule-type fears are limiting participation. (5) Banks have been told that short-rates won't rise for a really long time.