Universally Unloved

The biggest US (non-Fed) buyer doesn't want them. The Congress talks about deficit reduction and passes a Continuing Resolution that RAISES spending by 3.3B. The quantitative easing experiment still has 3 months to go but few think it has mattered. The currency in which you receive the coupon payments is steadily deteriorating. The inflation data is rising. AND YET-

The refunding goes well with only a short redistribution slip and forwards for short rates are at life of forever high prices (lowest implied yield). A page in Sydney Homer's tome can feel like an eternity, however. The bond bear ended in 1982 but the notes were still hated well into 1985. Count us in the "reluctant renter" camp. We have said many times that if you can't short rate product at zero, it's ceased to matter. This is the turning point of a generational shift in term structure. The cornucopia of chaotic global inputs certainly helps the complex do better near term.

The best thing US Notes have going for them right now is slowing economic growth and deteriorating small business confidence. Hardly the characteristics that the public would cheer for, something's got to give. Negative real yields (not just US now) have driven many into the arms of Gold and Silver. How that crowd acts if China floats (or re-pegs) the Renminbi higher is something we ponder, often.  In the meantime, the choppy road to nowhere continues. The 5 year, for all the trepidation, is where it was in December. A period of sleepy sideways clipping, terrible for traders-great for Fed/Treasury, is the least promulgated outcome. Sometimes, the best thing a product has going for it is being universally unloved.



Leave a Reply

Your email address will not be published. Required fields are marked *