May 16. Bond rally continues
–This year’s bond rally refuses to die, in spite of higher inflation data over the last two days (Core yoy +1.8%). Tens fell another 4 bps to 250. All euro$ calendar spreads made new lows with highest one year spread EDZ5/Z6 now just 108.5 (-2.0 on the day). Red/gold pack spread reached a new low of 243, having started the year at 303. 2/10 treasury spread dropped 3 to 214.5, also a new low.
–I don’t think I have ever seen as many people confounded by such a strong move. There is now more discussion (which almost takes the form of an excuse) of the Fed’s “terminal rate”, which the market has been lowering despite the blue dots in the last Fed SEP which were indicative of 4%. Of course, now it becomes likely that the June meeting will feature a shift lower in the dots. Gold eurodollar pack at 96.77 (3.23%) is more consistent with something like 3%. My personal view is that the move to lower rates has a variety of factors including the slowdown in China/Asia, the continued deflationary quagmire in Europe, the fact that low rates favor capital over labor, thus holding down wages, etc. I think that the levels we have recently reached are getting attractive for curve steepening moves, though perhaps there is a bit more left in the bond bull. In any case, the slowdown being telegraphed by the bond market is starting to give stocks the jitters, which could force even more of a flight into fixed income.
