The Bond Yield Conundrum

This past week I sent a special edition Outside the Box titled "Breakpoint in Iraq." I hope that you found it to be both timely and insightful. Today's article should be equally interesting with a unique take on the behavior of bond yields. My good friend Richard Duncan thinks rates were acting a little funny over the past couple of years, and he sheds some light as to why that might have been.

Richard Duncan has worked as a financial analyst in Asia for more than 18 years, conducting research and publishing investment reports on companies, industries, and economies from India to Japan. One of the first to warn of the impending economic crisis in Thailand in the mid-1990s, Mr. Duncan worked as a consultant for the International Monetary Fund at the height of the Asian financial crisis and subsequently joined the World Bank in Washington, D.C. He is also author of the widely acclaimed book The Dollar Crisis, published in 2003. Mr. Duncan currently works for ABN AMRO Asset Management as the Head of Investment Strategy.

John Mauldin, Editor
Outside the Box

subscribers@mauldineconomics.com

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The Bond Yield Conundrum
How It Started. Why It Ended.

By Richard Duncan

When the Federal Reserve began increasing the Federal Funds Rate in June 2004, the yield on 10-year Treasuries fell instead of rising. Indeed, yields remained below their mid-2004 level until April 2006, despite 15 rate hikes (see Figure 1.) Chairman Greenspan described that unexpected outcome as a "conundrum". In retrospect, it is now clear that the conundrum originated with the discovery…