Elaine Meinel Supkis
The Chinese leadership is so endearing. Whenever they jump some financial hurdle, they have Xinhua News tell us all about it. This is good for me because it brings to attention all sorts of things we Americans would like to ignore. This week, the Chinese have been talking about Outbound Investment and International Investment Positions. These are the underpinnings of our Free Trade universe.
's direct outbound investment will exceed 60 billion U.S. dollars by 2010, said Assistant Minister of Commerce Chen Jian here on Monday.
From the Federal Treasury, International Investment Position Statistics:
With direct investment at current cost:
With direct investment at market value:
Back in February, when he first addressed the issue of stubbornly
low bond yields, Federal Reserve Chairman Alan Greenspan called it a
"conundrum." The mystery revolved around a simple question: Why were
long-term interest rates falling even as the central bank was jacking
up short-term rates? Back then, Greenspan ventured that the anomaly
could be a temporary aberration and that in no time, bond yields might
start acting in more traditional ways.
More than three months -- and two more rate hikes -- later, bond yields have once again been falling, surprising not only Greenspan but many market pros as well. Indeed, in early June, yields on 10-year Treasury securities fell sharply, to below 4%. Greenspan doesn't think the falling yields are a sign of slower growth ahead, as many in the market believe. But even with the economy powering ahead, he seems increasingly convinced low bond yields may be an enduring phenomenon, driven by a complex of international forces the Fed has yet to fully understand.
That shift has some at the Fed entertaining hitherto heretical thoughts. Maybe, they posit, ultralow interest rates aren't inflationary in a global economy awash with savings and dominated by cutthroat competition from China, India, and other developing nations. After all, it's bond-market investors who have traditionally been most sensitive to any whiff of inflation. If they're willing to accept low yields, that suggests the U.S. and the global economy may be far more inflation-resistant than once thought.
Now, it's a multifaceted set of global capital and trade flows that
the Fed is trying to decipher. Part of the puzzle is that the U.S.
isn't the only place where bond yields are low; they're down throughout
much of the world. Indeed, in many countries, including Germany and
Japan, they're even lower than in the U.S. In part, of course, that
reflects the tepid outlook for growth in many foreign economies
compared with the U.S. But everyone at the Fed seems to agree that
something else is at work as well.
In struggling to figure out what's going on, Greenspan has focused on the increased integration of global financial markets and the stepped-up flow of capital worldwide. That has meant more of the world's savings can be invested across borders rather than being locked up in individual countries, as was the case with the former Soviet Union. As Greenspan tells it, investors' "home bias" -- their proclivity to keep their money in their own countries -- is diminishing, making a bigger pool of savings available internationally for investment in more profitable and productive ventures.
Some of Greenspan's colleagues at the Fed's board, including Vice-Chairman Roger W. Ferguson Jr. and outgoing Governor Ben S. Bernanke, have gone further. They argue that the world is awash with savings because of slumping demand for capital in the slow-growing economies of Europe and Japan and a buildup of currency reserves by China and other emerging Asian nations. Moreover, that global glut of savings is pushing down rates around the world.
The unusual behavior of long-term rates first became apparent almost
a year ago. In May and June of last year, market participants were
behaving as expected. With a firming of monetary policy by the Federal
Reserve widely expected, they built large short positions in long-term
debt instruments in anticipation of the increase in bond yields that
has been historically associated with a rising federal funds rate. But
by summer, pressures emerged in the marketplace that drove long-term
rates back down. In March of this year, market participants once again
bid up long-term rates, but as occurred last year, forces came into
play to make those increases short lived.
But what are those forces? Clearly, they are not operating solely in the United States. Long-term rates have moved lower virtually everywhere. Except in Japan, rates among the other foreign Group of Seven countries have declined notably more than have rates in the United States. Even in emerging economies, whose history has been too often marked by inflationary imbalances and unstable exchange rates, access to longer-term finance has improved. For many years, emerging-market long-term debt denominated in domestic currencies had generally been unsalable. But in 2003, Mexico, for example, was able to issue a twenty-year maturity, peso-denominated bond, the first such instrument ever. In recent months, Colombia issued domestic-currency-denominated global bonds. As rates came down worldwide, dollar-denominated EMBI+ spreads over U.S. Treasuries receded to historically low levels, before widening modestly of late.