Tuesday, October 30, 2012
The Yield Hunt - By Michael Lewitt
Anyone who does not understand that the price of every stock and every bond is being artificially altered by the fact that interest rates are being manipulated by the Federal Reserve should not be risking any money in the markets.
Monetary policy has driven investors to search for yield in the riskiest assets. Both subprime mortgages and Greek bonds have rallied to some of their highest levels in years on the back of central bank policy. In the U.S., the Federal Reserve is taking a lot of mortgage paper out of the market, which is forcing investors into riskier subprime paper. At least there are signs that the housing market has stabilized and is beginning to recover. In Europe, the European Central Bank (ECB) has somehow convinced some investors that Greek bonds are worth buying. But the Greek economy is continuing to fall into the abyss, and another bailout would just be throwing (more) good money after bad. If Greek bondholders are not forced to take losses – even if they are German and French banks – there will be little chance of Europe solving its debt crisis. But just as investors who speculated on an upset in Venezuela’s election are licking their wounds if they didn’t sell fast enough, those who are betting on a payoff on Greek bonds are likely to be injured here (more on Venezuela below).