Monday Musings

1. The US deficit, according to CBO estimates, declined from $1.4 trillion in 2009 to $506 billion in fiscal year 2014 and is projected to be even a bit lower in 2015. The change is nearly 1/3 of the Fed Balance Sheet and issuance cuts are an under stated part of the bond market "love in." The Parkhurst Corollary comes through again.  At the peak of the deficit/government spending hysteria I went on CNBC's Squawk Box and introduced the world to my mentor's teachings. The PC states- as readers here have heard before- "Economic knowledge is inversely proportional to concern for US public debt." As Bob Rubin pointed out to James Carville when bond vigilantes were still a thing- All you need to do is turn the trend and the economy will do the rest. The decrease in the rate of increase has been remarkable given the moderate pace of expansion. Imagine the impact if acceptance of our other Theory, that we are in a Structural not Liquidity, Trap had been addressed.

2. The Employment release failed to produce a linear day in bond futures. The 3 days to start the year and following concession absorbed most of the potential energy. Players moved into the Reds after several days of solid performance from 5s. I would watch this space closely as it is a battleground for the potential policy friction between the Fed and the ECB. The 2nd half of 2016 is roughly 1.5% and near the recent price high of the stability range. The Fed can reverse engineer a scenario: How do we get there, from here?

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