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The bond market as the Wonderful Wizard of Oz



September 16, 2010 – Comments (4)

Too often you see people worship the bond market. Here are the two common stereotypes and one corollary:

-Bond vigilantes are smarter than shareholders

-The bond market has the power of foresight  

And the corollary? It's this:

Since bond yields are low, it means someone who is smarter than us knows that we'll have a deflationary recession.

But bond market worshipers forget that they are not in fact dealing with wisdom of crowds here. We have a higher than usual demand for bonds as a result of a) Bernanke buying US treasuries as part of his QE, b) Chinese central bank buying treasuries in an attempt to spur its dying mercantilist horse into a gallop, c) Japanese central bank buying treasuries in an attempt to spur its dead merchantilist horse into a canter, d) Eurobureaucrats buying treasuries to show their loyalty to the Washington Party Committee, and e) Bankers buying treasuries to take advantage of the arbitrage opportunity provided by zero percent interest rates, which brings us back to Bernanke again.

None of these buyers are buying bonds with their own money and hence none can qualify as economic agents whose decisions might give us a clue about their perception of market trends. For all these buyers, the funds they park in bonds represent OPM: taxpayer's money for the Chinese and Japanese governments and the Eurobureaucrats, and printing press's money for Bernanke and his chosen groups of bankers. 

So after a moment's thought, the Wonderful Wizard of Oz turns out to be a fiction of bond market worshipers, and hidden behind the screen we see Ben's hot air balloon, two clueless central banks, and a bunch of party toadies anxious to show their commitment to Euro-Atlantic Partnership. This is your bond market and your wisdom of crowds.

What makes bond market worshipers think that this bunch of knaves and fools represent Mr. Market himself with His infinite wisdom, should be a subject of a separate psychiatric study. I wonder why they don't instead pray to tree stumps and stones. 


4 Comments – Post Your Own

#1) On September 17, 2010 at 11:55 AM, DarthMaul09 (29.10) wrote:

The Great American Bond Bubble

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#2) On September 17, 2010 at 11:59 AM, starbucks4ever (92.12) wrote:

Just headed toward a bond bubble? He doesn't think we are already there?

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#3) On September 17, 2010 at 6:18 PM, DarthMaul09 (29.10) wrote:

He's an academic economist, so for him to be this close to the right answer is remarkable.

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#4) On September 17, 2010 at 6:20 PM, starbucks4ever (92.12) wrote:

I agree :)

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