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.
Exports have been a solid contributor to US GDP growth for the last few years, while consumption and residential investment have been more restrained. Recently, with consumption firming and likely to improve further from the tail-wind of lower oil prices, and exports faltering, it appears the drivers of the US economy are trading places.
We mentioned yesterday that the US dollar is again breaking out and that tends to be negative for most stocks around the world. Today, we thought we would continue to look at US dollar strength. The nominal trade-weighted dollar index by major currencies is again very close to breaking out to 11+ year highs.
Perhaps one of the most important questions investors need to answer today is whether we’ve seen the low in the long bonds yields or whether the trend lower is firmly intact.
While we recognize that the negative year-over-year change in the US CPI may soon reverse given gas prices have risen by nearly 30 cents, we wanted to highlight how rare a negative year-over-year print is in the US.
After starting the year off with a bang (thanks to refinancing activity), US mortgage applications are tumbling back towards the depressed 2014 levels. Mortgage apps fell for the third straight week even as the purchase index rose for the first time in seven weeks.