Not even a month ago, we wrote about how it looked like the market was pricing in two rate hikes in 2015 and four in 2016. Well, apparently a lot has changed (at least regarding expectations) since then.
The spread between junk bonds and 10-year treasury on 6/23/14 hit a very narrow 222 basis points. At that time, the S&P 500 was trading at 1962. Since then the junk bond spread widened to over 5% in December and currently stands at 415 basis points.
NYSE margin debt increased by $20 billion in February. The one-month change is the largest change in 8 months. Margin debt is at the second highest level of all time and it currently stands just $787 million below the all-time high set in February 2014.
Throughout QE3, one of our favorite charts to look at was the three-month change in total fed assets. You could overlay this series with bonds or stocks or other economic indicators and find some interesting relationship.
Inflation is falling and so are inflation expectations. We and the majority of the rest of the financial community have been highlighting this for most of 2015.
In a nutshell, we are absolutely amazed at the amount of pain endured by speculators who are short long-term treasury bonds.
The collapse in yields around the developed world is startling. For fun, we wanted to see how many 5-year or longer dated government bonds are currently yielding less than the US 5-year on-the-run treasury bond (which is down 23 bps YTD itself).
While the CBOE SKEW Index has fallen back somewhat from highs last fall (see our comment here), it remains quite elevated– both relative to history and on an absolute basis. Indeed, the further the index rises above 100, the higher the probability of ’outlier returns’. For a full description of the indicator’s profile, see here.
With the release of (the plunging) producer price index today, we thought we would take a look at some of our latest PPI and trade price charts (i.e. February data point) that have been released in the last two days.
According to Fed Fund futures, the market currently expects about 2 rate hikes by December 2015 (assuming the Fed raises rates by 25 basis points each time). Fed Funds futures is pricing the Fed Funds Rate at 54 basis points by December 2015.