Tuesday, June 20, 2017


As we said, the Fed tightened as expected and indicated that there would be at least another move this year.  Once again, Billy the Dud felt it necessary to comment on things with a bright, rosy outlook for the economy.  The move and Billy bumped the two year up sharply but a funny thing happened; since the move and the jabbering, the 10 year actually declined to 2.18 % yesterday giving us the flattest yield curve in the past....well, as long as I can remember.  What happened?

The Dud has one answer.  Demand.  Everybody wants U.S. Debt.  Makes sense except I thought that everybody wants yield; Argentina...yeah, ARGENTINA...today announced plans for a $2.3 billion ONE HUNDRED YEAR private placement with a coupon in the area of 7.8 %. Maybe just crazy people want yield, but then again if the Argies pay interest for 9 years, you break even and every trader out there is absolutely sure he/she knows at the level this thing should be.  So maybe, except for Argentina Sovereign Debt Billy is right.

Or maybe some folks actually paid attention to what else the Fed talked about, namely the intention to "normalize" it's balance sheet which in case you missed it is up to $4.6 Trillion.  Nothing official, but number in the neighborhood of $300 Billion a year had been batted about.  Call me in 2025 to tell me how that works out.  Oh yeah, Mr Kaplan, new to the Dallas Fed says no problem so maybe you don't have to call me.

Anyway, that is a hell of a lot of money to spread about and a goodly portion of it is not straight treasury debt but mortgage backed...remember that stuff.  And one should also keep in mind that the ECB is up to it's gills under it's own program and at last look, still buying!  Then we have brother Carney at the Old Lady facing the May Mess and the Bank of Japan who was itself not an insignificant player.  There is probably the better part of  $10 Trillion of sterilized debt out there that at some point needs to be normalized.  Of course we can all rest easy in the knowledge of the existing close cooperation and coordination that exists between the major central banks of the world.  What Me Worry?

One thing to reduce concern is the number that this Administration seems to be doing on Dodd/Frank which will hopefully result in the recognition that the cost of unnecessary capital have proven to definitely reduce the liquidity of capital markets including the Treasury market and fix the situation. Quick.  The problems we have faced in the past were, in many cases, begun with the mispricing of risk.  I would suggest that a spread of 35b.p. between 2 and 10 year risk is no spread at all and as the 10 years is the starting point for all...or most...pricing of risk, may I further suggest that we haven't a real good handle..as we didn't at the turn of the century..as to how to price anything.  10 years ago with a theoretically far more liquid market, everything stopped.  Perhaps The Dud should stop talking and start thinking about that.

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