Monday, November 10, 2008

Inscrutable bond markets

But the big question is why the Chinese stimulus package didn't crush bond prices? If it is going to rescue the world economy, then interest rates should go up; if it suggests a fundamental reorientation of China towards itself, then it is the first of many Chinese stimulus packages, leaving less money to buy treasury notes, which should, of course, increase interest rates, too.

So the more depressing possibility, is that the bond markets expect a long and difficult near-deflationary period, so a four percent return is a real five or six percent return, and the assumption is that the economy will be so weak that even our local wealth will be tripping over itself to experience positive capital growth.

And thus we have more proof that the bond markets are just smarter and more emotionally mature than the equity markets.



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