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Bond Market

 
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arthur
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PostPosted: Sat Jan 15, 2005 11:49 am    Post subject: Bond Market Reply with quote

The U.S. continues to maintain large current account deficits and large capital account surpluses each year, which keep the balance of payments balanced. The larger U.S. trade (current account) deficit means foreign capital inflows into U.S. Treasury bonds are still strong.

The depreciation of the U.S. dollar has failed to shrink the U.S. current account deficit and the U.S. capital account surplus (because of the J-Curve Effect shown in the original Economics Universe e-book).

Eventually, both the U.S. current account deficit and U.S. capital account surplus will shrink. However, it may take an even weaker dollar to make U.S. imports relatively even more expensive than U.S. exports, causing Americans to buy fewer foreign products and foreigners to buy more American products.

I tend to believe, the trade imbalance is at its worse level and an improvement will take place in 2005. Import prices have been rising much faster than export prices. However, the price increases have been somewhat offset by faster U.S. income growth relative to our trading partners. Nonetheless, the disparity in income growth cannot be maintained (e.g. the Fed tightening cycle, which will lower consumption growth and raise the savings rate). So, I suspect the U.S. bond market is near a top.


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