Double Bubble?

US Rates

St. Louis Fed President James Bullard’s speech on Friday caught much attention. Bullard furthered the dovish Fed sentiment stating that if economic developments suggested increased disinflation risk, the Fed might consider purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant. He also tried to balance his outlook stating that “continued expansion is the most likely course going forward.” Bullard told reporters on a more hawkish note that while he continues to have concerns with the “extended period” language, he did not dissent as a mark of respect to the Fed’s practices.

Employment

The job environment in the US came under some threat last week as unemployment claims increased unexpectedly to 500k, the highest level since November 2009. The report printed a number higher than the maximum forecasts of 42 economists surveyed by Bloomberg, which ranged from 460k to 495k. The claims number induced a response from President Obama, who noted an urgent need for congressional action towards cutting taxes and easing credit for small businesses.

Economics

The Philadelphia Fed’s General Business Conditions Index plummeted to negative 7.7, decisively worse than expectations of positive 7 and in the contraction mode. The latest reading is the worst since July 2009 and down from 5.1 last month, pointing towards a possible trend of sluggish growth, if not worse.

Bond bubble?

Over the last few weeks, there has been intense debate on whether we are witnessing a bond bubble as yields have reached within striking distance in all the sectors of the curve, having crossed lowest levels in some tenors.

I don’t think there is a bond bubble. Just because yields are at all time lows is not reason enough. I can’t find the reason for yields to be higher. Treasury auctions have performed well as suggested by all bid to cover ratios. Japan reported highest ever holding of foreign debt. Economic numbers have come out weaker than expected, inflation has been docile, and the Fed has left the “extended period” language unchanged while sending dovish signals all over. The stock markets too have continued to perform poorly.

More on the bubble babble

http://www.cnbc.com/id/38785166

Double Dip?

That’s the big question!

On the one hand we’ve had Goldman Sachs saying that the possibilities of a double-dip recession “is unusually high- between 25 to 30%- but we do not see double dip as the base case.”

On the other hand the US bond market disagrees. The economy has never contracted with the difference between short-term and long-term yields as wide as it is now. Though, the yields have also have never been lower than now! According to the Federal Reserve Bank of Cleveland, the 2y10y slope (now 211 basis points) signals a 15.5% chance of a recession in the next year.