July 18. Geopolitical concerns rising to the forefront
–The downing of a Malaysian Airline jet over Ukraine, and Israel sending ground troops into Gaza spurred a safe haven trade, with the US ten year yield falling over 6 bps to 247. 30 yr bond yield made a new low for 2014, 329 at the futures close and 327.5 shortly afterwards. The curve flattened, with 5/30 at a new low of 164 and red/gold at 202, barely holding support. 2/10 also at a new low of 201. Stock indices retreated from highs, falling 1 to 1.4% (Nasdaq -1.4). For now, the curve still indicates strong probabilities of rate hikes next year, and while 5 yr notes dropped 5 bps to 165, there is quite a bit of curve roll down that will be greatly accelerated if the market changes its mind on hiking prospects. I would note that the ten year inflation index note yield is right at its lows for the year at 21 bps, having started the year at 3/4%.
–Vol firmed as the markets reacted to geopolitical strife, though only modestly. VIX jumped 32% but is still below 15, and right around average for the past 52 weeks.
–On a micro note, Stanley Druckenmiller 2 days ago said that IBM is the “poster child” for bad corporate behavior through financial engineering. He noted that revenues haven’t gone up in 6 years but that the company had loaded on debt to buy back shares (rather than to invest in plant and equipment). There is an informative piece on ZH that breaks down IBM’s financials, well worth a look. http://www.zerohedge.com/news/2014-07-17/scariest-chart-ibms-history Yesterday it bucked the trend and closed slightly positive in a down market as earnings were released.
