Comments on: Convexity vs Overseas Money Flows vs Real Yields vs The Fed

By: gray williams

gray williams — Thu, 14 Jun 2007 21:33:06 +0000

incredible post, this is fabulous stuff.

By: David Merkel

David Merkel — Thu, 14 Jun 2007 03:45:29 +0000

Thanks to all who commented. Estragon, credit spreads are a second order effect in this analysis. I neglect them for the sake of clarity. In normal times, credit spreads move inversely to Treasury yields In times of crisis, credit spreads widen… now in a crisis, Treasuries usually rally. This time, because the crisis was RMBS extension, we had credit spreads widening at the same time that treasury yields were widening. Unusual in historic terms, leaving aside years like 1994, and the dust-up in 2003.

That said, I wonder if the dollar is not losing its “safe haven” status, given our protracted and large current account deficit.

By: Paul from Kansas City

Paul from Kansas City — Wed, 13 Jun 2007 19:57:35 +0000

Thanks for this David.

By: AllanF

AllanF — Wed, 13 Jun 2007 17:18:09 +0000

Yes, excellent post. I think few stock investors/traders appreciate how bond buyers are completely different actors. The whole duration thing changes everything.

Also I was able to track down your bond portfolio in StockPickr, largely answering the questions from my previous comment.

Thanks again.

By: Estragon

Estragon — Wed, 13 Jun 2007 16:52:19 +0000

Very informative. One question though… do credit spreads not figure into the analysis?

By: Steve Milos

Steve Milos — Wed, 13 Jun 2007 12:19:56 +0000

David,

Great overview column.

As a subset of foreign money flows, the price of crude oil will have an impact on petrodollar recycling. If crude rises in price, then there are more petrodollars floating around; if it falls, fewer dollars to invest in the bond market. One other subset is the current trend towards asset shuffling, as foreign governments establish sovereign wealth funds. They may continue to still hold dollars, yet shift them from the bond market to equities, real estate, etc. This is a relatively nascent trend, but bears watching.