There’s a big bifurcation in the markets.
It’s not the hot-shot stock traders bidding up stocks on the premise that no equity market will go much lower in this environment.
No it’s the adults in the room as I like to call the bond market participants.
The sovereign debt market is magnitudes larger than stocks in valuation, with far stronger ties to the health of an economy, rather than Dow Jones industrial average, which Obama administration loves to cite as a good barometer of the robust growth of the US economy.
The maxim that the US 10-year rate marches in step with growth in the economy, appears to be dislocated in the government bond pits.
The US economy recently printed -0.7% annualized growth. Meaning no growth. Yet the US 10-year treasury note is moving toward 2.3% yield.
You really can’t say its a forward-looking rate, since Q2 “growth” is trending toward flat at best.
Even a cursory look at the Q1 number suggests that “growth” would have been closer to -3.0% if not for a vast inventory build during the quarter.
That figure on product built but not shipped can only depress next quarter’s number, since it did not move into the delivery pipeline.
So how does the bond traders arrive at a 10-year note of 2.2%?
The easy answer is there is a crowd exiting Uncle Sam’s IOU market for greener pastures where capital is treated better.
Could the bulge bank players be curtailing supply on the allocations in order to steepen the yield curve slightly in order to increase profits, since the Fed can’t move on rates? We won’t know the answer to that for sometime, but it’s worth a mention.
The scarier thought is that the crowd will grow larger and stampede out of US government debt. For now it’s a measure that needs to be watched.
A quick mention on the ADP report this morning of 201K private jobs in May.
ADP runs payroll for many of the largest service companies in America. Think McDonald’s, AppleBee’s and the like.
So while it says 201K private jobs, many of those new positions could come with the task of asking “Do you want fries with your order?”
That seems to be the trend in this “recovery.”