Saturday, June 16, 2007

The cat's out

On the way to junk status early? [link fixed]
GOVERNMENT bond markets are supposed to be the accountants of the financial world: calm, steady and rational. They are not supposed to frighten the horses. But in the days following June 7th, bond investors had a traumatic experience. The yield on the ten-year Treasury bond rose from 4.96% that day to reach 5.33% during trading on June 13th before closing just below 5.2%.

What makes the slump in bond prices all the odder is that Treasury bonds are normally regarded as the risk-free asset, the one that investors buy when they are really worried. What could have prompted the sell-off?
A higher risk-free rate will eventually raise the financing costs for everyone, from American homeowners fixing their mortgages, through hedge funds using leverage, to private-equity groups planning bids for quoted companies. It should also bear down (eventually) on economic growth.


When bond prices drop, yields go up.