Recently to the frustration of Fed Chairman, Alan Greenspan, T-
bonds or long term Treasury
Bond yields have been falling rapidly. Despite Greenspan’s raising of short-term interest rates, T-bond yields have continued to fall, bringing house mortgages down with them. This, Greenspan fears, may lead to over-investment and over commitment in real estate- possibly an economic bubble.
There are several different theories and possible explanations of this occurrence. One is that aging baby boomers on
pension plans have forced pension fund managers to move over to T-bonds causing increasing
demand and lower yields. Another theory is that the growth of Asian economies such as that of China, is pushing the demand for T-bonds which is a likely possibility since foreign nations have always wanted to peg investments to the dollar. A final theory is that global outsourcing and competition has led to domestic inflation which hurts bond yields. All these theories have been tried and tested, but Greenspan doesn’t believe that any of them are driving down bond yields. The demographic effects of the baby boomers is not new to him and the global demand for T-bonds has only a “modest effect” Greenspan writes. The falling
dollar would also seem counterintuitive to this foreign demand of U.S Treasury bonds.
In the end, writes TIMES journalist Daniel Kadlec, it may be that all the money flooded into the U.S Economy during Greenspan’s watch to bail out of the internet bubble, the recession, and other economic quagmires, may be finding itself into unlikely places- even T-bonds where investors are slowly consenting to an overpriced market.
Greenspan, six months from retiring from the Fed, may be worried about his legacy. It would really disappoint such an old-timer who has been through ups and downs to go out on a down- the real estate bubble. In the end, however, he is still sitting on a “conundrum” as investors seek out the best deals- even if they aren’t as he expects.
TIMES, July 11, 2005 pg. 36
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