NEW YORK, June 7 (Reuters) - U.S. government bonds were not entering a cyclical bear market, despite Thursday’s sharp sell off that pushed yields broadly above 5 percent, according to Merrill Lynch.
The spike in Treasury yields was attributed to fears of tighter monetary policy globally to quash rising inflation pressures. The sell off was also taken as a sign that investors were no longer convinced that the Federal Reserve would lower interest rates this year.
“I am not convinced that we are in a cyclical bear market. It’s the normalization of interest rates. I would call it the unwinding of the Greenspan conundrum. I think that is what is happening,” said David Rosenberg, Merrill Lynch’s chief economist for North America.
The Greenspan conundrum refers to the puzzle surrounding longer-dated bond yields being lower despite rising short-term interest rates and inflationary pressures.
“We were always trying to figure out why the yield curve was inverted. There have been lots of academic studies showing that there was at least a significant impact that foreign central banks had on the shape of the yield curve,” Rosenberg told a media briefing.
Foreign central banks, particularly Asian, are the biggest buyers of U.S. Treasuries and their purchases have contributed to keeping yields below the fed funds rate target, currently at 5.25 percent.
The yield curve has since assumed an upward slope and on Thursday, benchmark 10-year yields posted their biggest spike in three years.
“I don’t think this is an inflation story. It’s interesting that on a day that we had a 15 basis points back up in the 10-year yield, gold was down $9 an ounce. In some sense it’s a normalization story,” said Rosenberg.
The bond market sell-off was unlikely to be sustained over time, given projections of below-trend growth, which should help to keep inflation in check, he said.
Meanwhile, Merrill Lynch expects global gross domestic product (GDP) growth, excluding the United States, to average 5.7 percent this year, versus 5.9 percent in 2006, and moderating slightly to 5.5 percent in 2008.
Growth in the United States was forecast at 1.8 percent this year, braking sharply from 3.3 percent in 2006, and pushing to 2.6 percent in 2008.
“We do not expect a significant cyclical slowdown in the global economy before the second half of 2008. There is no significant policy tightening, no global inventory overhang,” said Alex Patelis, head of international economics.
“We are in an environment where interest rates are still being normalized higher, back to more reasonable levels.”
He noted that monetary policy tightening in Asia had not materialized to the extent it was forecast, but said he expected that tightening to take place in the form of currency appreciation.