Treasury prices have been surging. Yields are now around 90 basis points (0.90%) lower than they were about three months ago.  In other words, yields have dropped over 33% with the large minority of this decline occurring since the March Fed meeting, the meeting in which in my view the Committee radically changed direction.

On a percentage basis this is one of the most explosive rallies in history, a rally that is not predicated upon some extreme external event.

Earlier in the week I referenced JP Morgan research stating that it takes about one third the volume than it took ten years ago to move security prices in either direction because of the lack of liquidity.  The debt market today is about three times its size than it was in 2007.  Wow!

As stated many times, liquidity is absent largely because of regulatory fiat.

What happens when the environment changes?  There is little disagreement part of the Treasury advance is the result of the $10 trillion of negative real yields and zero percent German 10 year bonds as US Treasuries are attractive in this environment.  This is an extremely crowded one sided trade.

Perhaps the only word that will be used is ugly when the trend reverses itself.

Equities were mixed yesterday as the narrative of a slowing economy is rising to a fevered pitch.

What will happen today?  The last revision of fourth quarter GDP will be posted today and most are expecting growth to be revised lower to a 2.3% from the previously reported 2.6% pace.  However recently released today is suggesting first quarter growth with continue to have a “two handle,” the inverse of what the bond market is suggesting.  Today’s data may offer some insight.

Last night the foreign markets were mixed.  London was up 0.43%, Paris up 0.07% and Frankfurt up 0.29%.  China was down 0.92%,  Japan down 1.61%  and Hang Sang up 0.16%.

The Dow should open flat.  The 10-year is unchanged at 2.37%.


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