low bond yield explanations - let's count them up

[Spartacus]

I'm aiming here to get more possible explanations, not to pick the evildoers (that may come later). So please add more possible explanations, and correct me where I'm wrong about someone's position. The question mark means I think this is the person who originated this idea, but I can't be sure it's their original work

1. Rosenberg? Too few investment vehicles available because of IMF rules from the 1970s onward

2. Bernanke? worldwide savings glut

3. Gave-Kal- in the past, vast amounts of capital have been regularly wiped out by large-scale wars (WWI and II, Cold War). We are now in a situation where vast capital has not been destroyed for some time. (this appears to me to be a variation on (2.) above - savings glut, but a different explanation from where the glut is coming from).

4. Richenbacher/Daughty/Goldbugs/Bonner
Greenspan/Bernanke, liquidity

5. Noland - Central bank (but with lower emphasis than those in 4. above) liquidity and private liquidity, derivatves, leverage

6. Harry S Dent - demographics, demographics, demo ... . I'm unclear as to exactly what mechanism he proposes for bond yields being forced down by aging boomers, 10 years before their retirements. Oh, Dent's calling for DOW 15,000 in early 2008 and 20,000 late 2009.

Prechter? - does he offer an explanation?

Niederhofer - does he offer an explanation? All I get out of Niederhofer is (insult Buffet) then "free enterprise conquers all, buy the dips" (insult Buffet again) "1000% over the course of the century" (insult Buffett again).

(isn't it interesting that a lot of the "official" explanations are uni-variate/mono-causality ? Or are the official explanations more complex, but reported simplistically? )

99. me? (the ? means "is this combination of things unique to me)
1. reduced friction (electronic trading),
1a. automated, real-time arbitrage in a vast array of goods and services
1b. massive, massive carry trades
2. worldwide liquidity, both private and CB
3. worldwide (seemingly everyone but a few holdouts) alignment of government and central bank objectives, tools, techniques, agendas and orthodoxies (China and Japan and India and Korea and Germany and Britain and Saudi Arabia and the US all agreeing on monetary beliefs and actions)
4. "insurance"
5. leverage and Minksy-type "feel good, take more risks - the risks don't materialize, feel better, take more risks - the risks do materialize, the CB bails you out, feel better, take more risks)

[Finster]

Re: low bond yield explanations - let's count them up

Please add more, and correct me where I'm wrong about someone's position

1. Rosenberg? Too few investment vehicles available because of IMF rules from the 1970s onward

2. Bernanke? worldwide savings glut

3. Gave-Kal- in the past, vast amounts of capital have been regularly wiped out by large-scale wars (WWI and II, Cold War). We are now in a situation where vast capital has not been destroyed for some time. (this appears to me to be a variation on (2.) above - savings glut, but a different explanation from where the glut is coming from).

4. Richenbacher/Daughty/Goldbugs/Bonner
Greenspan/Bernanke, liquidity

5. Noland - Central bank (but with lower emphasis than those in 4. above) liquidity and private liquidity, derivatves, leverage

Prechter? - does he offer an explanation?

Niederhofer - does he offer an explanation? All I get out of Niederhofer is (insult Buffet) then "free enterprise conquers all, buy the dips" (insult Buffet again) "1000% over the course of the century" (insult Buffett again).

(isn't it interesting that a lot of the "official" explanations are uni-variate/mono-causality ? Or are the official explanations more complex, but reported simplistically? )

4. me?
1. reduced friction (electronic trading),
1a. automated, real-time arbitrage in a vast array of goods and services
1b. massive, massive carry trades
2. worldwide liquidity, both private and CB
3. worldwide (seemingly everyone but a few holdouts) alignment of government and central bank objectives, tools, techniques, agendas and orthodoxies (China and Japan and India and Korea and Germany and Britain and Saudi Arabia and the US all agreeing on monetary beliefs and actions)
4. "insurance"
5. leverage and Minksy-type "feel good, take more risks - the risks don't materialize, feel better, take more risks - the risks do materialize, the CB bails you out, feel better, take more risks)

I'll take Door #4 for $500, Alex. But let's put a finer point on it. It's a hangover from the Great Greenspan Inflation. It started years earlier, but really kicked into high gear when the stock market melted down in 2001-2002, especially right after 9-11 (Greenie always viewed monetary profligacy as the balm for whatever the crisis du jour was, financial or otherwise). The Greenspan Fed drove rates down to multi-generational "emergency" lows of 1% and held them there too long, then started normalizing too slowly. Hundreds of billions of dollars created out of thin air within the banking system flowed into the Treasury, financing deficit spending, and to homeowners via "equity extraction". These dollars then flowed overseas (in exchange for oil and flat-panel TVs) and piled up in foreign central banks. There still remains mountains of them out there, and they are still getting recycled back into our Treasury market. There they depress yields and exert upward price pressure.

It's called inflation. It pushed up prices of just about everything - stocks, homes, oil, gold, copper. Even Treasuries.

[jk]

Re: low bond yield explanations - let's count them up

i'd like to second the nominatation of the boj [you mention carry-trades, spartucus] , but add the boj's currency-pegging activites as well as the availability of derivative-based "insurance."

carry trades arbitrage global interest rates. if exchange rates were fixed, there would be no risk at all in borrowing in yen and investing in any and every other currency's bond market, pocketing the interest rate differential. the boj's pegging the yen against the dollar has taken much of the apparent risk out of the trade. add derivate-based insurance and traders feel very comfortable, indeed, in carrying enormous leverage arbitraging interest rates, driving them all in the direction of japanese short yields.

[WDCRob]

Re: low bond yield explanations - let's count them up

JK, you've mentioned the BOJ rates and Yen-carry several times over the last months. What would cause the Japanese to raise rates far enough to eliminate the arbitrage opportunity?

Finster, are you saying that the Fed's money creation is somehow responsible for those dollars piling up overseas? I can see how the Fed's activities might result in lots of dollars going overseas, but am missing how the Fed would be responsible if other CBs decide to hold them. Aren't the two separate?

Also...for anyone willing to answer...are there any economic/market-related pressures (i.e. not political/geopolitical) reasons China would suddenly decide let their currency float?

[jk]

Re: low bond yield explanations - let's count them up

JK, you've mentioned the BOJ rates and Yen-carry several times over the last months. What would cause the Japanese to raise rates far enough to eliminate the arbitrage opportunity?

Finster, are you saying that the Fed's money creation is somehow responsible for those dollars piling up overseas? I can see how the Fed's activities might result in lots of dollars going overseas, but am missing how the Fed would be responsible if other CBs decide to hold them. Aren't the two separate?

Also...for anyone willing to answer...are their any economic/market-related pressures (i.e. not political/geopolitical) reasons China would suddenly decide let their currency float?

i don't see the japanese raising rates by much for a long time. but i'm not sure that a large rise in rates would necessary to eliminate the arbitrage. if they raise rates some, then there will be some yen borrowers who decide to cash in. this will tend to strengthen the yen, spooking more yen borrowers who might decide to cash in. etc. i'm not saying this will happen. there was a little motion in this direction when japanese rates were raised to 0.25%, but the motion died down without causing a self-reinforcing feedback loop. but it could happen.

as for china- i just don't see a set of chinese domestic conditions would produce a desire to float their currency. perhaps someone else can come up with a scenario, but given that there is a huge, partially latent employment problem there, they would not want a stronger currency undermining some of their production. i say "partially latent" because of the large number of people still employed in state operated enterprises, being supported by bad debt. they might also worry about capital flight if the yuan were freely convertible.

[WDCRob]

Re: low bond yield explanations - let's count them up

About a month ago I dug up that CBs dollar holdings chart someone posted here this week. If I remember right the nations on the list that could afford to/might want to really put the screws to the US were mostly in OPEC. Their overall dollar holdings were pretty small compared to the total outstanding, but I've got no frame of refernce for how these things play out at the margins. What would it take to *really* spook Japan, China, England and other dollar-friendly countries if unfriendly countries started dumping dollars?

[Finster]

Re: low bond yield explanations - let's count them up

Finster, are you saying that the Fed's money creation is somehow responsible for those dollars piling up overseas?

Absolutely. Dollars cannot pile up anywhere without first being created.

I can see how the Fed's activities might result in lots of dollars going overseas, but am missing how the Fed would be responsible if other CBs decide to hold them. Aren't the two separate?

What else would the other countries do with them? The sheer masses of them is phenomenal. They can spend part of them on things like oil, cement, copper, etceteras ... and to the extent they do prices rise. The exact same thing happens when they do anything else with them. Whatever they buy with them, the price rises. The reasonable thing for them is to spread them around. The US Treasury market is unique for its size and liquidity, and therefore makes a logical target.

[Spartacus]

Re: low bond yield explanations - let's count them up

Whatever they buy with them, the price rises.

I would think that this would depend on how the dollars were sterilized in the first place.

If the Chinese banking system has lent money based on a reserve of US dollars, then that lent money has to be un-lent before the US dollars can come out of the reserve system.

Depending on what the reserve fraction is, the amount of money to be un-lent could be substantial, so it could be the case that the Chinese spending $1 US would entail overall liquidity withdrawal - the total supply of worldwide money would be reduced - ie, monetary deflation.

[jk]

Re: low bond yield explanations - let's count them up

re the yen carry trade. i just heard a couple more possible theoretical causes for the carry trade to unwind.

part of the carry trade is conducted by japanese who borrow in yen to invest outside their country.
1. if there is a sell off in emerging markets or other destinations for those investments, they might repatriate funds, raising the value of the yen.
2. if the nikkei were to start a sustained rise they might repatriate and raise the value of the yen.

more generally, if there is a general asset decline, mirroring the general asset rise of recent history, declining investments will be liquidated and yen borrowings repaid, raising the value of the yen and starting a stampede to close carry trades before the yen rises more.