For about six weeks, between the middle of January and the first week of March, inflation expectations embedded in the US Treasury market bounced after declining for the second half of 2014.
Three weeks ago we mentioned how Fed assets were finally declining on a quarterly basis. Since then we have had a few more data points released and the trend is still downward.
There is a geographic disparity amongst the Citi Economic Surprise Index. Economies, both developed and emerging, are surprising to the upside in Asia and Europe while economies in the western hemisphere are not doing as well (at least in terms of meeting and exceeding expectations). Below we show some of the more interesting charts.
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).