There are so many well-written stock-specific articles on Real Money that sometimes it feels like a drag to write a macro column. Especially about sovereign bonds which will never have the pizazz -- or potential upside -- of investing in securities of individual companies. You ignore the macro at your own peril, though (2008, for example), so here's a quick check-up on the most liquid rates for your weekend reading pleasure.
I won't belabor the analysis of the U.S. Treasury market, other than to note that the 10-Year's yield of 2.85% shows the resiliency of the bond bulls in their steadfast determination to keep that yield under 3%. The pressure is at the other end of the curve, with the Fed expected to raise rates three or four times this year, and, clearly, the bankers' best friend -- the spread between short- and long-term rates -- is disappearing. With only 56 basis points separating the current yield on the two- and 10-year Treasury notes, there is less marginal momentum for commercial and industrial lending.
After a Trump Jump in early 2017, commercial and industrial (C&I) lending in the U.S. has slowed to a growth rate of between 1% and 2%, and that indicates an economy that is expanding slowly, not roaring, as you might divine from looking at the levels of the U.S. stock market.
The real action in the sovereign bond markets has been in the European weaker credits. In the past year the yield on the Portuguese 10-year note has dropped a whopping 252 basis points and now sits at 172 basis points. That's indicative of a bond market that perceives that the European Union will not let its weaker members default, and is even more evident in the Greek 10-year note's 208 basis point decline in the past year to 4.15%.
If you are buying Greek government paper for that yield, you are out of your mind. Someone is, though, because the implicit bailout guarantee is there, and the Greek electorate's decision to remain in the eurozone has proven to be a very wise decision.
The strong credits in the European sovereign bond market have performed similarly to the U.S. 10-year. Yields are up 10, 12 and 18 basis points year on year, respectively, in Switzerland, the U.K. and Germany, and the market has been relatively stable for that paper. With a 10-year yield of 1.43%, U.K. 10-year gilts are proving that the post-referendum scaremongering over Brexit was incredibly ill-conceived and, frankly, quite dumb.
I spent last week in Europe, mostly in the U.K. and I can attest that the U.K. economy is just fine and that City bankers (or at least my old friends in that line of work) are still cautiously optimistic on the post-Brexit future. With Volkswagen's (VLKAY) Bentley brand and soon-to-IPO'd Aston Martin both posting record unit volume in 2017, I guess that optimism is manifesting itself in tangible ways, as well.
The most interesting move in the global sovereign market has been the Japanese 10-year note's move toward 0% after rising to nearly 0.10% in February. That's a very small move in percentage terms, but in a market that is as micromanaged by the government as the Japanese Government Bond market is, it bears watching. Japanese short rates remain negative, but less so than they were a year ago, and a flattening yield curve is contractionary.
So, it has been quiet in the global bond markets, and the massive contraction in spreads between stronger and weaker credits show that it may be too quiet. February showed us that the complacency in the U.S stock market is not always the wisest strategy, and the Euro bond markets are so boring now that it actually worries me. Not enough to liquidate portfolios, to be sure, but enough to put in a pin in it and to start watching these markets on a daily basis once again.