Bridgewater Associates: Global Yields Beginning to Adjust - March 2006
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Bridgewater Associates: Global Yields Beginning to Adjust - March 2006

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Bridgewater Associates: Collection of Writings (1999-2012)

Bridgewater Associates: Collection of Writings (1999-2012)

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Bridgewater Associates: Global Yields Beginning to Adjust - March 2006 Bridgewater Associates: Global Yields Beginning to Adjust - March 2006 Document Transcript

  • Bridgewater ® Daily Observations is protected by copyright. No part of the Bridgewater ® Daily Observations can be duplicated or redistributed without prior consent from Bridgewater Associates. Copying or redistribution of The Bridgewater ® Daily Observations is in violation of the U.S. Federal copyright law (T 17,U.S. code). 1 Bridgewater ® Daily Observations 03/03/2006 Bridgewater® Daily Observations March 3, 2006 © 2006 Bridgewater Associates, Inc. (203) 226-3030 Bob Prince Jason Rotenberg United States Global yields beginning to adjust: Revised 3/10/2006 World interest rates are too low and this realization is beginning to sink in. Thursday’s market action was indicative of the coming phase of global interest rate conditions. Yields will rise globally on both the short and long end of countries’ yield curves and the U.S. bond market will increasingly be driven by developments abroad. As competing interest rates rise to higher levels, U.S. interest rates, particularly U.S. bond yields, will be forced to rise to levels that are sufficient to attract 85% of the world’s capital, the financing requirement of the unprecedented U.S. current account deficit. Like a desperate debtor pinned against the wall by a loan shark, the U.S. will have to pay any price for money until the dollar declines enough to diminish the need for capital. Ironically, the magnitude of this adjustment will be even greater because yields have been driven to uneconomically low levels as a result of over-purchasing of U.S. bonds by the world’s central bankers. Thursday provided the first clear image of this new paradigm. The ECB tightened, bunds and U.S. bonds fell on no domestic information in the U.S., and both bond markets continued to fall on Friday (helped along by the ISM report). Weakness was more severe in bonds than short rates, while the dollar fell, because the selling pressures reflected capital flight and a necessary repricing of U.S. assets to attract foreign capital rather than an increased expectation of Fed tightening. The U.S. bond market is now extremely vulnerable to a rise in bond yields abroad, which makes the bond market vulnerable to a multitude of highly likely possibilities: among these are Euroland growth, Japanese growth, Japanese inflation, increased business capital expenditures, Chinese currency revaluation, increased domestic investment by oil exporters, rising inflation in east Asian countries that are now running stimulative policies with strong growth, etc. To give you a picture of how pervasive the low interest rates are, we will flash through a number of countries from two perspectives: comparing short term interest rates to nominal GDP growth rates, which roughly compares marginal debt service costs to income growth, and comparing real long term interest rates to the equity risk premium, giving a rough approximation of the expected return of bonds vs. stocks. Both perspectives show that interest rates are unsustainably low all over the world. The following charts show short-term interest rates in relation to nominal GDP growth in the developed world and in portions of the developing world where capital outflows are significant. Short-term interest rates are unusually low in every country around the world except the U.K.
  • 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 80 83 86 89 92 95 98 01 04 Chn 3M Rate China Nom GDP Y/Y super low -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 80 83 86 89 92 95 98 01 04 Hkg 3M Rate Hong Kong Nom GDP Y/Y low -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 80 83 86 89 92 95 98 01 04 Idr 3M Rate Indonesia Nom GDP Y/Y low -10% 0% 10% 20% 30% 40% 50% 60% 70% 80 83 86 89 92 95 98 01 04 Kor 3M Rate Korea Nom GDP Y/Y normal -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 80 83 86 89 92 95 98 01 04 M al 3M Rate M alaysia Nom GDP Y/Y low 0% 10% 20% 30% 40% 50% 60% 80 83 86 89 92 95 98 01 04 Php 3M Rate Philippines Nom GDP Y/Y low -50% 0% 50% 100% 150% 200% 250% 300% 350% 400% 95 96 97 98 99 00 01 02 03 04 05 06 Rus 3M Rate Russia Nom GDP Y/Y low -5% 0% 5% 10% 15% 20% 25% 30% 80 83 86 89 92 95 98 01 04 Sgp 3M Rate Singapore Nom GDP Y/Y low 2 Bridgewater ® Daily Observations 03/03/2006
  • -10% 0% 10% 20% 30% 40% 50% 80 83 86 89 92 95 98 01 04 Tai 3M Rate Taiwan Nom GDP Y/Y low -5% 0% 5% 10% 15% 20% 25% 80 83 86 89 92 95 98 01 04 Aus 3M Rate Australia Nom GDP Y/Y low -5% 0% 5% 10% 15% 20% 25% 80 83 86 89 92 95 98 01 04 Can 3M Rate Canada Nom GDP Y/Y low 0% 5% 10% 15% 20% 25% 80 83 86 89 92 95 98 01 04 Eur 3M Rate Euroland Nom GDP Y/Y low -5% 0% 5% 10% 15% 20% 25% 80 83 86 89 92 95 98 01 04 Jpn 3M Rate Japan Nom GDP Y/Y low 0% 5% 10% 15% 20% 25% 30% 80 83 86 89 92 95 98 01 04 Gbr 3M Rate United Kingdom Nom GDP Y/Y Only one w / high rates 0% 5% 10% 15% 20% 25% 80 83 86 89 92 95 98 01 04 Usa 3M Rate United States Nom GDP Y/Y low 3 Bridgewater ® Daily Observations 03/03/2006
  • The next set of charts show that real bond yields are unusually low in relation to the equity risk premium in every developed country. -4% 1% 6% 11% 16% 70 73 76 79 82 85 88 91 94 97 00 03 06 Aus Real Yield Aus Equity Risk Premium -10% -5% 0% 5% 10% 15% 70 73 76 79 82 85 88 91 94 97 00 03 06 Can Real Yield Can Equity Risk Premium -6% -1% 4% 9% 14% 70 73 76 79 82 85 88 91 94 97 00 03 06 Eur Real Yield Eur Equity Risk Premium -2% 0% 2% 4% 6% 8% 10% 12% 70 73 76 79 82 85 88 91 94 97 00 03 06 Jpn Real Yield Jpn Equity Risk Premium -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 70 73 76 79 82 85 88 91 94 97 00 03 06 Gbr Real Yield Gbr Equity Risk Premium -2% 0% 2% 4% 6% 8% 10% 12% 70 73 76 79 82 85 88 91 94 97 00 03 06 USA Real Yield USA Equity Risk Premium 4 Bridgewater ® Daily Observations 03/03/2006
  • -15% -10% -5% 0% 5% 10% 70 73 76 79 82 85 88 91 94 97 00 03 06 Australia Real Yield M inus Equity Risk Premium low -15% -10% -5% 0% 5% 10% 70 73 76 79 82 85 88 91 94 97 00 03 06 Canada Real Yield M inus Equity Risk Premium low -15% -10% -5% 0% 5% 10% 70 73 76 79 82 85 88 91 94 97 00 03 06 Euroland Real Yield M inus Equity Risk Premium low -10% -8% -6% -4% -2% 0% 2% 4% 6% 70 73 76 79 82 85 88 91 94 97 00 03 06 Japan Real Yield M inus Equity Risk Premium low -30% -25% -20% -15% -10% -5% 0% 5% 10% 70 73 76 79 82 85 88 91 94 97 00 03 06 United Kingdom Real Yield M inus Equity Risk Premium low -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 70 73 76 79 82 85 88 91 94 97 00 03 06 United States Real Yield M inus Equity Risk Premium low 5 Bridgewater ® Daily Observations 03/03/2006
  • 6 Bridgewater ® Daily Observations 03/03/2006 Interest rates are unsustainably low all around the world. In the next couple of years they will rise, with rises led by markets abroad, and this will pressure U.S. bond yields higher and the dollar lower. The pressure will be exacerbated by the increasing need for the U.S. Fed to tighten as increasingly tight labor markets gradually raise the probability and reality of higher wage inflation. None of this is currently discounted in bond markets. Bridgewater Daily Observations is prepared by and is the property of Bridgewater Associates, Inc. and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives or tolerances of any of the recipients. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This report is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Bridgewater research is based primarily upon proprietary analysis of current public information from sources that Bridgewater considers reliable, but it do not assume responsibility for the accuracy of the data. The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. The views represent Bridgewater's outright views in these specific markets, but not all markets that Bridgewater trades. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.