Global interest rate “conundrum” recalls the 1930s

[undeterred]

By Nick Beams WSWS
14 June 2005

It says something about the state of the world financial system when one of the key figures supposedly in charge of its operations publicly declares that he has very little idea about what is going on. For some time now, US Federal Reserve Board chairman Alan Greenspan has been pondering what he calls a “conundrum” in the international bond market. Over the past year, the Fed has been lifting its base interest rate after reducing it to a record low to counter the recessionary impact of the collapse of the share market bubble. Normally this would have lead to an increase in long-term interest rates. However, in this case, long-term interest rates have been falling over the past year.

Greenspan first raised the issue in his testimony to the US Senate Banking Committee on February 16, noting that long -term interest rates were lower than when the central bank began its series of tightenings. Noting similar declines in the rest of the world, he pointed out that the greater integration of the world’s financial markets had increased the “pool of savings”, while there was a lower inflation risk premium. However, these developments were not new and could not be the reason for the long-term interest rate decline over the previous nine months.

“For the moment,” he continued, “the broadly unanticipated behaviour 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.” Nearly four months on, the Fed chief seems no closer to an explanation. In an address to a bankers’ conference in Beijing on June 6, he pointed out that the “pronounced decline” in the return on long-term US Treasury bonds—down by 80 basis points, while the federal funds rate increased by 200 basis points over the same period—was “clearly without recent precedent”.

Greenspan put forward several possible explanations for this unusual behaviour. Among them were: the possibility that the market was signalling future economic weakness; that pension funds are making significant bond market purchases and pushing down interest rates; that the accumulation of US Treasury debt by foreign central banks is lowering long-term rates; and that the greater integration of financial markets has increased the supply of savings, thereby lowering the interest rates. However, none of these explanations seemed to provide a satisfactory answer.

http://www.wsws.org/articles/2005/jun2005/bond-j14.shtml

[leveymg]

1. Returns on public debt are depressed for two reasons:

1) risk aversion (anticipation of declining returns on private issues) by fund managers and institutions have driven a shift away from corporate shares and bonds;

2) Foreign central bankers are trying desperately to keep the value of US currency and holdings afloat by continuing to buy Treasuries (despite the warnings), aware as they are that if the US takes the big plunge, their economies are going down with it.

None of this is exactly encouraging news.:bounce: