Big Al was too quick to dismiss Asian connection in rates riddle

'US Federal Reserve chairman Alan Greenspan has called the fall in yields a 'conundrum'. Addressing a Beijing video link on Monday, Mr Greenspan dismissed several explanations, including economic weakness, pension funds moving into bonds and bond buying by Asian central banks'

South China Morning Post

June 9

IT IS A CONUNDRUM for more than Mr Greenspan alone. Our interest rates are driven by US interest rates courtesy of the peg to the US dollar, and the continuing decline in yields on longer term US fixed-income instruments has implications for Hong Kong.

The first chart tells you the story. The Hong Kong dollar three-month interbank rate is now within a whisker of the yield on the 10-year Exchange Fund bond. It can briefly go higher, of course, but, if it does so for a longer period, there could be some painful dislocations in our financial system.

The yield on the 10-year bond should really have been headed up by now but it is captive to its US equivalent and there is just no sign at all of rising yields on US treasuries, a conundrum indeed.

Let us deal with explanations that Mr Greenspan dismisses. Others are not quite as ready as he is to dismiss economic weakness in the US but they have to make their case on a forecast basis. At present, the US economy is still performing well and Mr Greenspan can justify his confidence.