Wednesday August 10, 2005 - 11:23:24 GMT
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Black Swan Capital - www.blackswantrading.com
Bonds look pricey...after #10
“It ain’t over till it’s over.”
With the lights turned low at the Chinese central bank, they did what many didn’t think they would do, they peaked into the “secret basket” and revealed its contents to the world. Now we’re talking transparency.
A day earlier, across the globe, the pontificators of transparency at the Fed revealed once again what everyone seemed to know—US interest rates are going higher. No big deal. No great secret. But you have to wonder at what point your average billion dollar bond fund manager stops buying long bonds on the news rates are going higher? Will they ever? Maybe the 10th time is the charmer.
Morgan’s Richard Berner says we could see a 5% GDP for the third quarter—5%!!! Yikes! In fact, he is seeing something the Fed doesn’t seem too concerned about—inflation (our emphasis):
“Slack in both product and labor markets is dwindling, labor costs are gradually accelerating, monetary policy is still accommodative, and inflation expectations are drifting higher. Dwindling slack in product markets was a key factor in our call for a rebirth of pricing power 2½ years ago, and there is little doubt in our view that it will continue.
“Tightening labor markets and slower productivity gains will both work to boost growth in unit labor costs towards 3% over the next several quarters. And judging by the economy’s performance and the behavior of inflation itself, monetary policy remains accommodative.”
The question is: Has the stretch for yield squeezed too much inflation premium out of the long end of the market? If the answer is yes, and we do get a 5% GDP in the 3rd quarter, it would seem bonds are very, very pricey here.
Chart: Bonds vs Fed Funds
Black Swan Capital
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