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Position: Short the iPath U.S. Treasury Steepener (STPP)

Yesterday afternoon in our Virtual Portfolio, Keith shorted the iPath U.S. Treasury Steepener ETN (STPP). By shorting this security, we are making an explicit call that we expect the U.S. Treasury curve to compress. Our conviction in this position is rock solid – especially given that we’re already long the iPath U.S. Treasury Flattener ETN (FLAT) in our Virtual Portfolio.

Broken TRADE and TREND, the U.S. sovereign debt market is not confirming higher-highs in U.S. equities – at least for now. That could of course change, but we need to see more data to assign a higher probability to the view that the equity market will lead domestic bond yields higher. After all, long-term Treasury yields have led U.S. equities lower in every market sell-off dating back to 2007.

Shorting Misguided Expectations: STPP Trade Update - 1

For now, we maintain our conviction that Growth Slows As Inflation Accelerates and that the latter is largely driven by weak-dollar monetary and fiscal policy out of D.C. – which remains the one factor [among many] that few investors analyze with any real scrutiny. Moreover, why consensus continues to confuse accelerating inflation expectations with a faster outlook for growth via storytelling about topics such as “peak oil”, “emerging market demand”, and “U.S. manufacturing/exports” is far beyond our ability to comprehend at this point.

While it is not our style to search for confirmation from talking heads, it’s comforting to know that Federal Reserve Bank of Dallas President Richard Fisher shares our sentiment to some degree:

"I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation… Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial-market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery."

Consistently misguided growth expectations are personally perplexing indeed.

Darius Dale

Senior Analyst