Morning Report – Will 2015 be a benign year for bonds? 11/24/14

Stocks are higher this morning on speculation that the ECB will take further measures to boost growth. Bonds and MBS are down.

This is a short week with the Thanksgiving holiday. Friday will be an early close in the bond market. We have a lot of data on Tuesday and Wednesday.

Economic growth moderated in October, according to the Chicago Fed. Production-related indicators were negative, while employment-related indicators were positive.

Even as the Fed ends QE, the demand for sovereign debt remains insatiable. J.P Morgan is forecasting demand for sovereign debt will exceed supply by $400 billion in 2015 as worldwide business confidence drops and inflation remains nowhere to be seen. This has been largely a European phenomenon, however the laws of relative value will affect US bonds as well. Note that US Treasuries yield more than the G7 average, by a lot. In fact, it has risen from flat to 77 basis points since the Fed announced it would end QE in mid-2013. We are approaching levels not seen since 2006. The upshot? Demand for European debt will keep a bid under Treasuries. In other words, the environment remains suitable for continuing low rates. Interesting that pretty much every strategist on the Street has gotten this one wrong.

Fun fact: Of the PIIGS, Italy, Ireland, and Spain yield less than the US. Only Portugal and Greece yield more. It makes you wonder if the Fed and the ECB have created a monster – a sovereign debt bubble.

Chart: Treasury spread to G7 debt. (in other words, the 10-year yield minus the average 10 year bond yield for the G7 countries).

Obama says that “Americans will want that new car smell and someone that doesn’t have as much mileage as me.” FWIW, Hillary will have quite the amount of mileage on her, as she will be pushing 70 in 2016. But she smells nice, I guess.

14 Responses

  1. “Obama says that “Americans will want that new car smell and someone that doesn’t have as much mileage as me.” FWIW, Hillary will have quite the amount of mileage on her, as she will be pushing 70 in 2016. But she smells nice, I guess.”

    He’s Mr. Helpfull for other Democrats just like with the Senate. Next up he’ll say that he’s not running in 2016, but his policies are on the ballot, every single one.

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  2. Safe to say the Sen-elect Ernst won’t be supporting repeal or defunding Risk Corridor’s.

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  3. Thanks, jnc! Got it bookmarked for later reading.

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  4. Brent, please see this story.

    http://tinyurl.com/n4p25rg

    The story again expresses her known aversion to the financial industry. However, it goes beyond that. It explains her misunderstanding, or perhaps her intentional misrepresentation, of a merger of which she was critical, and it suggests an explosive temperament, a la John McCain, and a willingness to grandstand.

    Brent, aside from her enmity toward Wall Street, have you seen continuing evidence of misunderstanding, or misrepresentation, or rushing to judgment? I assume in advance you will answer “yes”, but can you give me one or two specific examples like this story? I would like to be specific in my criticism of her and I frankly haven’t followed her closely enough to do so.

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    • Mark:

      Brent, aside from her enmity toward Wall Street, have you seen continuing evidence of misunderstanding, or misrepresentation, or rushing to judgment?

      A couple of examples.

      On the Hobby Lobby decision: “I cannot believe that we are even having a debate about whether employers can deny women access to birth control. Guys, this is 2014, not 1914. Most Americans thought this was settled long, long ago. But for some reason, Republicans keep dragging us back here – over and over and over again.”

      This is a complete mischaracterization of both the issue, which had absolutely nothing whatsoever to do with employers denying women access to birth control, and what “most Americans” think.

      On federally subsidized student loans: ““The banks pay interest that is one-ninth of the amount that students will be asked to pay. That’s just wrong. It doesn’t reflect our values…the banks get exceptionally low interest rates because the economy is still shaky and banks need access to cheap credit to continue the recovery.”

      Warren is referring to the rate banks pay at the fed discount window, but what she either doesn’t know or (more likely) is misrepresenting is that the rate that banks pay at the discount window is for overnight loans that are collateralized, while student loans are both long term (10+ years) and uncollateralized. The two simply are not comparable in any meaningful way.

      Mark, the woman is a complete and utter charlatan. You want evidence of her lack of understanding, misrepresentation, or rush to judgement? Just listen to her whenever she opens her mouth.

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      • Thanx, Scott. The student loan interest example is one that I can use. In this instance,the logical extension of her criticism is that she would prefer someone at Treasury who did not have an intimate understanding of how the IRC affects decision making. Which is irrational.

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  5. Mark, one instance that comes to mind is that she was railing on the banks doing “illegal” non- QM loans, which completely contradicted the guidance that Cordray wants to get across – that non QM loans are not necessarily “bad” loans, and lenders shouldn’t necessarily avoid non-QM loans. QM was meant to give lenders a safe harbor. I was surprised she and Cordray were not singing from the same sheet of music. But again, I think she wanted to get in a shot.

    Will try and see if I can find a copy of the speech where she said it.

    Also, we tried having non-bankers as Treasury Secretaries under W, with the Snow Man and the Tin Man. Neither one was prepared for the fact that markets parse every word very carefully and both tended to speak off the cuff. You don’t necessarily want a Jack Welch type giving guidance to the markets about the dollar.

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