How can anyone not short 10-year U.S. Treasuries at 2.4% with job growth and economic expansion increasing in strength?
At the same time, how can anyone not be LONG U.S. Treasuries with French 10-year bonds yielding 1.3%, even though the short-euro call is a very crowded trade? This is a world where the European Central Bank just makes a surprise rate cut -- done, I think, to take the euro quickly below $1.25.
This conundrum is incredibly important because it does say that one of these two markets, if not both, is very wrong. I mean VERY wrong.
Obviously I am not just talking about France. Three years ago we were talking about Italian and Spanish 10-year bonds at 7% with their governments about to go bust.
Now we are talking about 10-year Treasuries at the same yield as ours, and while the countries are a tad more solvent they certainly have to be considered just parking instruments. But then again, that makes German 10-years at under 1% no-parking instruments unless you feel that deflation's going to continue at a 1-2% pace.
Obviously in Europe there is no demand for money, which is largely why ECB head Mario Draghi is frantically pulling out the stops talking about buying asset-backed bonds. Anything to get anyone to borrow and then build or buy or create -- that's his mantra.
Here there's demand, but our banks are petrified to show any uptick in bad loans that would just bring them back in the crosshairs of the government. Better just to say no.
Over there no one's asking, so there is nobody to say no to.
Here our banks are squeaky clean and yet is there a day that goes by that we hear they aren't and there is so much more work to do to ensure they don't collapse?
There the banks have never even had real stress tests and have been able to do whatever they want and are still part of the problem and can't even be part of the solution.
In this environment, what are people doing?
I think that most institutions here that are required to have little risk with their cash are simply doing what everyone else is doing, which is accepting the total lack of yield as a given. They know that only through creating some real growth can they generate returns and they aren't going to get returns on their money without taking on some real risk.
I think that most institutions there regard their fixed-income instruments as VERY risky and are keeping the pressure on the yields of our risk-free assets by continuing to buy our bonds.
Yesterday someone asked me if there was anything really compelling in the equity market. I said I can understand why people would feel the answer is no. But when you consider the stories of the two bond markets, you have to admit that a U.S. company with real growth or with a real yield is a total bargain vs. all of this fixed-income nonsense and when you have one with both, then you have the holy grail of the moment. In fact, it's amazing that there are any at all and yet there are still hundreds of good growth stocks with good yields to be found.
That's why it is so darned hard for this market to go down and stay down. It remains, when you look at the fixed income world, a saner more investable place. Not safer, because these are riskier assets, but certainly saner when you think about it.