Brad DeLong's Semi-Daily Journal: A Weblog

It's not just the White House that has been feeding reporters bad leads. The WSJ recent reported that Greenspan might change the press statement to reflect the balance of risks shifted toward inflation. Let's think about this. No hint of worry about inflation in public statements prior to the meeting. Financial institutions closing up books for the turn of the year, making changes in financing difficult for themselves and their clients. The Fed still admittedly accommodative in its policy stance, so that a risk of inflation would necessarily mean moving to more rapid rate hikes. Under those circumstances, the Fed was going to say, all of a sudden, that inflation is a risk? The WSJ needs to never, ever talk to those sources again.

If you thought 2.00% was questionable, you must LOVE 2.25%...about as much as those of us who bought the 3-month bill this coming Thursday.

This should move prime to 5.25%, which implies a 30-year mortgage rate of, what, something between 6.45% and 6.75%?

If they do, indeed, "[n]either speed up or slow down the pace of rate changes next year" (that is, five increases in six months), the OPTIMISTIC target would be prime around 7.25% and mortgages no lower than 8.50% by year-end 2005. Better sell quickly...

GS plays the game, but is in fact terribly afraid

The Federal Funds rate is raised again, and as a result the interest rate on the long term Treasury note fell to 4.13%. The bull market in bonds continues through 22 years. Evidently we are headed at least to a Federal Runds Rate of 3%. What will be especially interesting and important is whether long term interest rates continue to stay so low. I know of no other Fed tightening sequence where there has been a decline in long term rates from the initial Fed tightening and steadiness thereafter.

The screams you here are those carrying heavy credit card debt, as the thumbscrews tighten.

Question to Anne. Does this shift suggest that the market thinks Treasury will borrow short term rather than medium or long to fund the deficit? I remember in the early to mid-60s Robert Roosa got the yield curve inverted to prop up the dollar. Does the long rate reflect the projected deficit? If not, why not?

Question to Knut:
'2005 - 1965 = ?' Hey, my dear, times are changing...

In suport of Knut: It was only 2 years ago that worries over deflation and running into the zero bound on nominal interest rates plus fear of crushing the money market mutual fund business had people rereading the history of operation twist.

are corporate books, which are in fine shape, many bursting with cash to spend on either increased dividends or share buybacks and an hesitancy if not outright reluctance to go on corporate spending sprees (according to Barron's etc) contributing to this strange bull market in govt bonds? or, is this all central bank purchasing?

Once again, Greenspan is "fine tuning". Fine tuning means slowly tightening until there is a failure, just like '87.

Knut Wicksell and Lawrence

The Treasury is indeed trying to borrow short term funds, saving on interest payments. The low level of long term interest rates reflects foreign central bank purchases, and a sense that with labor costs rising slowly there is little long term inflation pressure developing. Treasury and government agency debt is being periodically bought by Japan, China, India, Singapore, Brazil and other central banks.

Corporate saving is as robust as at any time in 20 years.

Since 1955 the spread between fed funds and the 10 year t bond has averaged 88 basis points,
around a modest upward slope. With the spread now around 200 basis points we still have significant room for more curve flatening as we have had over the past year.

Anne, smack me. I never made the connection.

Under Clinton, the bond was killed off because we were paying down debt. Logically, under Bush fiscal policy, the bond should come back. When Treasury talks to primary dealers, many want the bond back. The bond has not come back, though. I'll bet that when Treasury talks to central banks, they hear that 2s and maybe 5s are the maturity of preference. Under Bush national savings policy, issuing bonds is counterproductive. One issues 2s, of course. Thank you.

KHarris

"I'll bet that when Treasury talks to central banks, they hear that 2s and maybe 5s are the maturity of preference. Under Bush national savings policy, issuing bonds is counterproductive. One issues 2s, of course."

Nicely done, as always!

http://flagship3.vanguard.com/VGApp/hnw/FundsByName

Vanguard Returns
12/31/03 to 12/14/04

S&P is up 9.9%
Growth Index is 6.5
Value Index is 13.8

Mid Cap Index is 18.1%

Small Cap Index is 17.8%
Small Cap Value is 21.4

Europe Index is 17.7
Pacific Index is 11.1

Energy is 33.7
Health Care is 8.0
REIT Index is 28.6

High Yield Corporate Bond Fund is 8.2
Long Term Corporate Bond Fund is 9.1

....

http://www.msci.com/equity/index2.html

National Index Returns
12/31/03 - 12/13/04

Australia 22.4
Canada 16.5
Denmark 27.6
France 15.9
Germany 13.2
Hong Kong 20.9
Ireland 38.4
Japan 7.2
Norway 47.9
Sweden 34.3
Switzerland 12.4
UK 17.5