This morning’s narrowing between 10s and 2s has resulted in a +126 basis point spread. This is well off the higher levels that we saw in both late October and early November when I started to get more constructive on US Equities (see chart). In “The New Reality” of American Capitalism, we need to be able to see an expedited wealth transfer from the levered long to the liquid long investor. Steepening the curve is the best way to ensure that process takes hold. It’s the only way to incentivize those with real savings to lend.
It’s not only 2 month Treasury yields that increased on a week over week basis last week (from 0.74% to 0.88%), short rates like 3 month Treasuries went from 0.00 (ZERO) to +0.06%. I have long maintained the most basic of arithmetic thesis’ that once you cut to zero, the only way to move next is UP. Now, albeit slowly, that’s starting to happen… and this development should be monitored very closely on a day to day basis. This is why the XLF (Financials) continue to underperform.