The U.S. markets are getting worried again - but this time the fear is refreshingly different.
The worry is that economic growth may be about to accelerate.
After five years of a disappointing economy, such a concern sounds too good to be true, and perhaps it is. But imagine what will happen if it is not. We've been complaining for years about how slow the recovery is. It would be great if it sped up appreciably.
You might not know that if you listened to some of the commentary these days. Those who see a black cloud behind every silver lining can point to plenty of negatives in a good economy. Bond investors will lose money as the value of long-term bonds declines.
That will mean that a lot of people are poorer. Banks own a lot of Treasurys, and some of them could suffer as the value of those bonds decline. Perhaps rising interest rates will prompt a sell-off in the stock market. Perhaps they will choke off the recovery in the housing market.
The federal government will suffer a hit from having to pay higher interest rates as it borrows money. The Federal Reserve, which has bought a lot of long-term government bonds and mortgage securities, will lose money - perhaps a lot of it - as it sells those securities at lower prices than it paid.
It might lose so much money that it stops funneling profits to the Treasury, further damaging the government's fiscal position.
Added to those specifics is the feeling that we are about to enter unprecedented territory. Just as the Fed never before engaged in quantitative easing, it has never before unwound the positions. Who knows whether it can handle the challenge?
"The Federal Reserve will need to carefully navigate through the completion of quantitative easing," the Organization for Economic Cooperation and Development said this week in its generally gloomy semiannual global economic forecast.
"A premature exit could jeopardize the fragile recovery, but waiting too long could result in a disorderly exit from the program with sizable financial losses."
Of course, we've all known that - someday - the Fed would have to start reducing its positions. But on Wall Street, someday can seem a very long way off.
"This was supposed to be next year's trade," a hedge fund manager told me this week.
What made it seem like this year's trade was the sudden backup in the bond market that began early in May and accelerated late in the month after the Fed's chairman, Ben S. Bernanke, mused that the Fed might be able to start to backing off the easing program later this year.
The yield on 10-year Treasurys, below 1.7 percent early this month, rose above 2.1 percent Tuesday. That may not sound like a lot, but to owners of such bonds it is a problem. If they bought at the latest auction of 10-year Treasurys, on May 8, the value of their securities fell enough in three weeks to offset more than a year of income.
indiatimes.com
After five years of a disappointing economy, such a concern sounds too good to be true, and perhaps it is. But imagine what will happen if it is not. We've been complaining for years about how slow the recovery is. It would be great if it sped up appreciably.
You might not know that if you listened to some of the commentary these days. Those who see a black cloud behind every silver lining can point to plenty of negatives in a good economy. Bond investors will lose money as the value of long-term bonds declines.
That will mean that a lot of people are poorer. Banks own a lot of Treasurys, and some of them could suffer as the value of those bonds decline. Perhaps rising interest rates will prompt a sell-off in the stock market. Perhaps they will choke off the recovery in the housing market.
The federal government will suffer a hit from having to pay higher interest rates as it borrows money. The Federal Reserve, which has bought a lot of long-term government bonds and mortgage securities, will lose money - perhaps a lot of it - as it sells those securities at lower prices than it paid.
It might lose so much money that it stops funneling profits to the Treasury, further damaging the government's fiscal position.
Added to those specifics is the feeling that we are about to enter unprecedented territory. Just as the Fed never before engaged in quantitative easing, it has never before unwound the positions. Who knows whether it can handle the challenge?
"The Federal Reserve will need to carefully navigate through the completion of quantitative easing," the Organization for Economic Cooperation and Development said this week in its generally gloomy semiannual global economic forecast.
"A premature exit could jeopardize the fragile recovery, but waiting too long could result in a disorderly exit from the program with sizable financial losses."
Of course, we've all known that - someday - the Fed would have to start reducing its positions. But on Wall Street, someday can seem a very long way off.
"This was supposed to be next year's trade," a hedge fund manager told me this week.
What made it seem like this year's trade was the sudden backup in the bond market that began early in May and accelerated late in the month after the Fed's chairman, Ben S. Bernanke, mused that the Fed might be able to start to backing off the easing program later this year.
The yield on 10-year Treasurys, below 1.7 percent early this month, rose above 2.1 percent Tuesday. That may not sound like a lot, but to owners of such bonds it is a problem. If they bought at the latest auction of 10-year Treasurys, on May 8, the value of their securities fell enough in three weeks to offset more than a year of income.
indiatimes.com
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