Expecting a Bond Selloff

In today's Wall Street Journal, the article "Treasurys' Swoon Doesn't Rattle Debt Investors" (http://www.wsj.com/articles/treasurys-swoon-doesnt-rattle-debt-investors-1435195058) has a great discussion of the reasons for (and against) a Treasury bond selloff. This information ties directly into our discussion of bond prices and yields in Chapter 7.

If investors believe the economy is recovering, they will sell bonds. This will put downward pressure on the bond prices and raise their yields. The article implies that this has been happening, albeit slowly. In turn, this indicates that investors at large are not convinced the economy is recovering fast enough to leave the security of Treasuries (many investors invest in Treasurys for their relative safety), partly driven by inflationary fears and other considerations.

One potential drawback of a massive selloff in government debt that is ignored by the article is that there may be a mass exodus from government debt once the selloff starts. While higher yields may be attractive to new investors in debt, a sudden and pronounced drop in prices may lead current investors to sell their Treasurys before prices go even lower.

I am not convinced, given the current economic data, that interest rates should be raised. However, one advantage of raising rates is that they can be lowered if things get worse. We have pretty much exhausted all other (monetary) avenues of stimulus. 

As Greece Nears A Potential "Grexit"

As sad as the Greek situation is, a potential "Grexit" from the eurozone is far in the future. In fact, it is not even a certainty that nonpayment of the IMF's payment of 1.54 billion euros later this month would constitute a default. It also largely depends on how the different creditors and players in this Greek tragedy will interact. For example, it will be up to the European Central Bank (ECB) to decide whether to keep the Bank of Greece liquid. Despite all this, events later this week should give a pretty good indication of the direction in which we can expect things to move in the future.

Since I teach Financial Management, the whole Greek situation serves well to illustrate the relationship between bond prices and yields. It also serves to illustrate a "flight to quality" by investors. Early last week, for example, German sovereign bond yields surged to over 1%, a first in many a moon. Why did the yield increase so much? At that time, it looked like negotiations between Greece and the creditors (the IMF, ECB, and European Commission, among others) were going well, and that an agreement would be reached. Consequently, investors pulled money out of safe German bonds and invested them in something perhaps a little more risky. As a result, German bond prices dropped and yields rose. A similar situation can be observed with Spanish bonds over the last few days; if Greece exits the eurozone, then Spain may be considered to go next. As a result, investors are selling off Spanish bonds, raising their yields. At the same time, investors are flooding back into German bonds, raising their prices and depressing their yields. These actions serve to widen the yield between Spanish and German bonds.

The U.K. Study on "Poshness Test"

Today, I was going through the motions of checking news on various outlets. CNBC was reporting a study that mentioned something called the "Poshness Test" in the U.K. News surrounding this study is reported in various outlets, such as The Guardian (see http://www.theguardian.com/society/2015/jun/15/poshness-tests-block-working-class-applicants-at-top-companies). Essentially, the study found that elite law, accountancy, and financial services firms in the U.K. hire the vast majority of their employees from elite or private schools. The article then implies discrimination on part of the firms against graduates from state universities. I admit that I have not read the study in its entirety, but I did glance at it to see what schools these firms hire from predominantly (you can find the full study at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/434791/A_qualitative_evaluation_of_non-educational_barriers_to_the_elite_professions.pdf). Among that list are Oxford and Cambridge.

I think there are two issues here. First, ignoring everything else, isn't it the right of employers to hire from the institutions they want to hire from? HR professionals at these firms are not stupid - their firms are highly successful. Isn't a logical question then why these firms would hire from these very expensive institutions, undoubtedly paying a premium for their new employees? This leads straight to the second point: Why are the firms willing to pay such a premium. Could is possibly have something to do with the quality of education the graduates receive at these institutions? The study itself briefly acknowledges that the quality of teaching and socialization is better at these elite institutions. In fact, one firm tried to leave of the institution of the CVs when making the hiring decision. Guess what? Hiring officials simply looked for other indicators of quality, such as speech and accent.

The study strongly suggests that we should focus on other indicators than the graduating institutions to identify more well-rounded individuals. I am all for this, but only if the hiring firm believes that it will result in hiring a better employee, not because it has to give everyone a shot. If the latter is the end result, then what is the point of sending your kid to an elite institution. Hey, maybe we should just abolish them!

In the extreme, why not skip the whole education thing. Just go out on the street with a sign that says "We are hiring!" and take the first 20 (or however many employees you need) who line up. Quality is apparently becoming irrelevant and firms are no longer allowed to consider it in their hiring decisions.