IN SEARCH OF A TOP

 

Lately everyone has been sharing their thoughts on the yield curve with me.  Unsolicited.  PMs, academics, floor traders  -even some of my nefarious journalist contacts.

 

The general breakdown of these opinions seems to suggest that the more sophisticated your understanding of finance or impressive your credentials, the more likely you are to arrive at a thesis (with complex academic underpinnings naturally) that could support a sustained period at a range close to present levels. Mere mortals tend to expect the curve to moderate sooner and faster, and tend to expect absolute yield to rise more significantly. 

 

As Keith noted in his morning note today, the Treasury Department sponsored limbo contest on the short end of the curve has literally left depositors bending over backwards to help  fatten margins for lending institutions with the spread between the 2 year and the 10 year above 270 basis points the curve is at its steepest point in living memory.  I drew the chart below to illustrate the current spread in context. The outlying points since 1976 focused on are the spikes in 1992 and 2003 as the flow of cheap money that Chairman Greenspan let loose to combat recession drove spreads north of 250 basis points; while the monster backwardation in early 1980 marks the height of Paul Volcker's assault on double digit inflation.

 

The obvious initial conclusion that anyone would draw from this picture visually is that mean reversion should have a moderating impact on the slope of the curve. Additionally, any casual observer could reasonably surmise that with nowhere for short term yields to go but up and with the debt to GDP ratio of the US balance sheet continuing to balloon, the fundamental catalyst for this reversion is both clear and present.  The spread between short term treasuries and the target rate has diverged for sustained periods in the past (as well as jumping wildly in the volatile 1982-83 market) so indications from the Fed that rate policy will not change in the near term do not negate these presumptions.

 

As always, the moment of confirmation for the peak will arrive well after it has passed.  Until then you can continue to feel free to share your view with me.

 

Andrew Barber

Director

 

IN SEARCH OF A TOP - spreads


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more