WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan on Friday called recent losses in the bond market "substantial," and said they were due in part to flight by investors from bond mutual funds.
"In recent weeks, the worldwide financial system has been subject to considerable stress, with substantial losses in the combined stock and bond markets in the United States," Greenspan said in a speech delivered at Wartburg College in Waverly, Iowa. Fed officials distributed the text of the speech in Washington.
"The decline in bond prices was no doubt exacerbated by significant net redemptions in bond mutual funds, as fund shareholders reacted to declines in net asset values when interest rates backed up," Greenspan said.
Greenspan called some of the downturn in financial markets "the result of an unavoidable correction to what had become an unsustainable situation in which higher relative rates seemed to be riskless."
The losses in financial markets have also tested the ability of regulators to manage the risk from derivatives, he said.
Most analysts expected short-term interest rates to rise only modestly this year, with even less of a rise in long-term rates. Foreign bond rates have also gone higher, instead of slipping as predicted.
The rise in global bond yields apparently has helped fuel worries about the U.S. dollar and prompted this week's intervention by the Fed and foreign central banks.
