June 17. Flatter curve going into FOMC
–Going into the FOMC the curve continues to flatten, with 5/30 treasury spread at a new low just under 170. Red/gold pack spread fell 3.25 to 226. Since June of last year this spread’s range has been 189 to 306, so it’s now much nearer to the low despite the fact that all the Fed has done thus far is taper. The Fed is considering putting an exit fee on bond funds to prevent a panic sell off, but the market trades as if any actual tightening will spur long end BUYING. Near euro$ spreads edged to new highs. For example, EDU4/Z4 settled 4.5, up 0.5. EDU4/EDU5 settled 54.5, up 2. The widest one year calendar is still EDZ5/EDZ6, down 1 on the day to 108.
–The Fed’s concern with ‘reach for yield’ and financial instability is mostly a product of its own making. In terms of stocks, “The total number of outstanding shares of stock available has shrunk by nearly 10% since the end of 2010. This is according to S&P Dow Jones Indices.” [Buybacks of $477b last year, along with mergers/acquisitions]. There are reports of central banks diversifying into stocks for reserves, and of Japan’s pension funds also casting a wider asset net. This huge pool of liquidity only serves to push forward returns lower.
–Two snippets in the same day. Business Insider reports that the Chinese city of Wuhan is planning to build the tallest buildings in the world, ironically named the Phoenix project. The LA Times reports that Chinese investors are buying up US gold courses. A page right out of the Japanese (1980’s) playbook before the crash.
