The “B” WAS Silent … PIIGSB

Lather, Rinse. Repeat. These are mostly just blips on the screen that eventually lead someone to think about austerity and sooner or later there are riots in streets? We often post up visuals OF 10yr spread of one country or another┬ávs Germany and not for nothin’, when you think about the widening today in 10yr peripherals, on heels of yesterday and day before and day before, well, out in the ‘Land of the Big 01s’, there are REAL P&L consequences behind these widening visuals. For now, though, we’ll just offer another visual – this time of Belgium (who’s claim to fame are some of our favorites: BEER, CHOCOLATE, WAFFLES AND FRENCH FRIES) vs Germany (out almost 20bps on the day):

SO the “B” was silent and is no more. Higher ‘spreads’ equals higher cost of funding equals higher debt/gdp ratios (not good unless you have a chance of ‘growing your way out’ of the mess) which eventually equals … what … riots in the street? We GET where/why Rick Santelli and Tea Party comes from but to be honest with you, the more we think about these things the LESS clear we’re getting. We’re NOT the perma-bear and we get that data has been less bad but we do NOT think less bad over 1.5yrs IN to an economic recovery party Tiny Tims throwing should be acceptable and/or good enough. We should be OFF THE CHARTS good and we’re NOT. We THINK thats a problem.

Now on the other side of the coin, we GET that since QE1 was announced, USTs sold off. We’re sticking pretty much TO the script since QE2. If it weren’t for the Korean penninsula and the crisis in the EU, yields would probably BE higher right now. But … they aren’t. Lets say they are going higher, then are we to apply the same logic as above?? Higher yields have consequence (tight capital to be even tighter – think that might impact housing data??) and if we use the EU model it won’t be long before … austerity is coming to a theater near you and us too …

Confused here but thinking outloud and trying to make a bond-specific point. With rate-sensitive housing sector STILL IN THE TANK and loads of people out of work putting pressure on wages to at the very LEAST, NOT GO UP, we see that inflation is in check. With the alleged ‘risk free’ rate at/near 5% (long strips) during the recent sell-off, mean-reversion and THEN SOME makes an abundant amount of sense to us. Throw in a Fed that becomes more ‘hawkish’ next year and we really start to LOVE the longer end of the curve. There we go again, though. Back to square one.

Lather, Rinse. Repeat.

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