Shorter Greenspan: I don’t know what is happening, but whatever it is it can’t be good.
Alan Greenspan, Federal Reserve chairman, on Monday night highlighted the unusual behaviour of global bond markets, and acknowledged that investors might be correctly signalling a period of economic weakness ahead.
Since last June, the US central bank has raised short-term interest rates from 1 per cent to 3 per cent but the yield on the 10-year Treasury note has declined by about 80 basis points to just under 4 per cent.
Emerging market bond spreads have fallen to low levels, and the spread of investment grade corporate bonds and junk bonds over Treasury bonds has declined.
“The economic and financial world is changing in ways that we still do not fully comprehend,” Mr Greenspan said.
Some analysts have suggested the market signal meant the Federal Reserve would soon end its interest rate tightening cycle. Mr Greenspan acknowledged that “policymakers need to be able to rely more on the markets’ self-adjusting prices and less on officials’ uncertain forecasting capabilities”.
Mr Greenspan said: “One prominent hypothesis is that the markets are signalling economic weakness. This is certainly a credible notion.”