Blog: Spirit of Money, Financial Fluidity
by munificent

short term rising long term flattening

Bernanke -maybe a Greenspan clone? Well let's face it lower rates didn't really stimulate the overall market enough to break out of a 4 year trading range- so ababy it's bonds- but as rates rise bond NAV declines- Oh dear what can the matter be...Now what? short the individual positions and go long certain individual positions, and write covered calls on sleepy dividend paying stocks..Why, you are a frigging genius!

Date:   11/16/2005 12:03:21 PM   ( 16 y ) ... viewed 1612 times

During his confirmation hearing before the Senate Banking Committee Tuesday, Ben Bernanke was given an opportunity for a do-over -- or at least the chance to clear his name.

Asked if he may have drawn any lessons from any particular comments made during his years as a Fed governor, the Federal Reserve Chair nominee didn't hesitate: "In 2003, there was an episode where there was clearly miscommunication between the Federal Reserve and the bond markets [regarding deflation risks] and it caused a significant fluctuation in the bond markets," he said. "Clearly there was a misunderstanding about that risk."

This episode crystallized a belief in "the need for greater transparency on the part of the central bank," Bernanke said. But on Wall Street, the important lesson Tuesday was not about the central bank's modus operandi but about the man himself.

Without saying it in so many words, Bernanke was telling fixed-income participants that they should abandon any lingering perception about him being a dove on inflation.

Bernanke had been dubbed "helicopter Ben" by some for suggesting during the 2002-03 deflation scare that the Fed could always print money and drop it from helicopters to inject liquidity into the financial system.

His "miscommunication" remarks were made after the bond market closed on Tuesday. But the bond market had already gotten the gist of Bernanke's point earlier when he said, "Currently, inflation is above the range which in the long run would be desirable."

The 10-year Treasury bond gained 12/32 in price while its yield, which moves inversely, fell to 4.56%.

" [Bernanke's] goal was to tell the market that he's not a dove on inflation, because he had that reputation," says Marc Pado, market strategist at Cantor Fitzgerald. "His point is that, even if he has a different methodology [than Alan Greenspan] , his goal to maintain price stability remains the same. And what he said was what the bond market wanted to hear."

But while short-term rates have been rising along with expectations of more rate hikes, long-term yields have stopped rising since last week, indicating that inflation expectations might be priced in bond prices for now. The price of gold, which often tracks inflation expectations, has fallen from its recent 18-year high but traded above $470 per ounce intraday Tuesday before settling at $469.

Meanwhile, the yield curve, which plots the yields of short- and long-term bonds, keeps on flattening. The spread between the yield of the two-year government bond -- which closed at 4.46% -- and that of the 10-year has narrowed to 10 basis points. A flattening yield curve points to market expectations of an economic slowdown; outright inversion has historically been a harbinger of recession.

Major averages fell Tuesday, weighed down by weakness in General Motors (GM:NYSE - news - research - Cramer's Take), Target (TGT:NYSE - news - research - Cramer's Take) and financials such as Citigroup (C:NYSE - news - research - Cramer's Take). This offset strength in names such as Johnson & Johnson (JNJ:NYSE - news - research - Cramer's Take) and (AMZN:Nasdaq - news - research - Cramer's Take)

But the decline was modest for stock proxies and more likely the result of an overextended market retreating after a three-week rally vs. worries about a recession next year, according to Cantor's Pado.

But "at some point, we'll invert the yield curve," Pado says. "The Fed will push rates higher and we may have to withstand a recession, even for a short while, because that's the best thing for the economy in the long run."

A slowdown in the economy next year could be accentuated as consumers take a hit from this winter's heating and credit card bills, he says. In addition, the evident cooling in the housing market will likely diminish homeowners' appetite for home equity extraction, which has fueled much of the consumption binge of the past few years.

During his confirmation hearing, Bernanke also repeated Greenspan's remarks that home price appreciation will likely continue to moderate and cited this as a cause of concern for the economy next year.

Read this last sentence my friends~

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