Across the Curve

Fed Governor Powell Muses on the Economy

Via Bloomberg:

Declan Harty
DeclanHarty
Jeanna Smialek
jeannasmialek
June 28, 2016 — 7:00 PM EDT

Powell says it is far too early to judge effects of U.K. vote
Important to assess appropriate U.S. policy stance post-Brexit

Federal Reserve Governor Jerome Powell said global risks have shifted further to the downside after Britain’s vote to exit the European Union, introducing new uncertainties that may merit reassessing monetary policy.

“The Brexit vote has the potential to create new headwinds for economies around the world, including our own,” Powell said Tuesday in remarks prepared for delivery to the Chicago Council on Global Affairs. “As the global outlook evolves, it will be important to assess the implications for the U.S. economy, and for the stance of policy appropriate to foster continued progress toward our objectives of maximum employment and price stability.”

The U.K.’s June 23 decision to leave the EU touched off market turmoil and spurred central banks including the Fed to assure investors that they were prepared to provide liquidity to the system, a promise Powell reiterated on Tuesday. The Fed governor also discussed his outlook for the U.S. economy, and said that monetary policy needs to stay easy.

“Weakness in economic activity around the world and related bouts of financial volatility have weighed on the performance of our economy,” Powell said. “Monetary policy will need to remain supportive of growth, as we work through the challenging global environment.”

Though financial conditions have tightened in the wake of the Brexit vote, Powell said markets have continued to function in an orderly manner.

Powell said that labor market strength has been a “key feature of the recovery” that has allowed the Fed to look through output growth fluctuations, making weak April and May jobs data “worrisome.” He said the Fed has “more work to do to assure that inflation moves back up to our 2 percent goal,” and that it’s essential to make sure inflation expectations remain anchored.

Because the interest rate that would keep the economy operating at an even keel with full employment and stable prices has fallen, “policy is actually only moderately stimulative” today, Powell said in his remarks. He added that he expects the so-called “neutral rate” to move up over time.

Powell also warned that many economies, including the U.S., risk falling into a post-financial crisis state where both potential output and the growth rate are permanently reduced.

“We need policies that support labor force participation and the development of skills, business hiring and investment, and productivity growth,” Powell said. “For the most part, these policies are outside the remit of the Federal Reserve, but monetary policy can contribute by supporting a strong and durable expansion, in a context of price stability.”

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“Don’t Delude Yourself”

Via Bloomberg:

Merkel Tells Cameron Before EU Summit: Don’t Delude Yourself
2016-06-28 10:00:39.101 GMT

By Ian Wishart, John Follain and Jonathan Stearns
(Bloomberg) — German Chancellor Angela Merkel warned the
U.K. to have no illusions about life outside the European Union,
hardening her stance ahead of Prime Minister David Cameron’s
first meeting with fellow EU leaders since triggering the
political earthquake that’s shaken the bloc’s foundations.
Merkel, in her toughest response yet to last week’s British
vote to quit the 28-nation EU, said that the U.K. can’t expect
favored treatment once it leaves and that there will be no
informal talks on a new relationship before the government in
London files its application for divorce.
“There shouldn’t be the slightest misunderstanding about
the conditions laid out in the European treaties for a case like
this,” Merkel said in a speech to Germany’s parliament in Berlin
on Tuesday. “My only advice to our British friends is: Don’t
delude yourself about the necessary decisions that need to be
taken.”
Merkel won applause from German lawmakers as she laid out
her approach to the two-day summit of EU leaders in Brussels
that will be dominated by Brexit and the political and economic
fallout reverberating across Europe. Cameron will endure an
awkward dinner with his EU counterparts after his effort to calm
the U.K.’s divided public and soothe investors failed to stop
the pound and the country’s biggest banks from getting
clobbered.
The premier has already announced he will quit after last
week’s vote, leaving him little leverage at the table, and back
in London, the race to succeed him is heating up. His government
has signaled it prefers a gradual exit from the EU while the
euro region’s three largest economies are keen to set a
timetable to contain the economic damage.
“We will ensure the cherry-picking principle won’t apply in
the negotiations,” Merkel said. “There must be — and there will
be — a palpable difference between a country that wants to be
part of the European Union and one that doesn’t.”
The EU gathering unfurls against a backdrop of market
turmoil, with shares in Barclays Plc and Royal Bank of Scotland
Group Plc crashing to their lowest level since the financial
crisis. More than $4 trillion have been erased from global
equity values in the aftermath of the June 23 plebiscite as the
pound extended its record selloff.
The selloff was halted Tuesday, with stocks and sterling
gaining. The pound was up 0.7 percent as of 10:44 a.m. in
London.
Reeling from the referendum outcome, EU leaders are split
on how hard to come down on the U.K. In the meantime, Britons
have lost any influence they had in the bloc while remaining
bound by its rules and membership fees for at least two years.
“The rest of the EU feel they bent over backwards to
accommodate Cameron over the last months and he launched this
reckless referendum and lost it, so the other EU states are in
no mood to do him any favors,” said Mark Leonard, director of
the European Council on Foreign Relations. “We don’t know how
long he is going to be prime minister for, when a new government
could begin to negotiate terms.”

Political Impasse

For now, the U.K. is stuck in a political impasse.
Cameron’s Conservative Party said Monday a new leader should be
in place by Sept. 2. Some in the EU are holding out hope that if
the U.K. waits a long time to activate the exit trigger, the
decision to leave might even be reversed, one European diplomat
said.
A YouGov Plc poll of Conservative voters for the Times
newspaper gave Home Secretary Theresa May 31 percent support
compared with 24 percent for former London Mayor Boris Johnson,
a leading backer of the Leave vote.
Chancellor of the Exchequer George Osborne, who was
criticized by the pro-Brexit camp for scaremongering over the
economy, will not be a candidate. The one-time favorite to
succeed Cameron wrote in the Times that “I am not the person to
provide the unity my party needs.”

Last Supper?

In Brussels, Cameron will be pressed to give some
indication on how he expects the U.K. to trigger Article 50 of
the Lisbon Treaty — the mechanism for leaving the EU — and
what he thinks Britain’s relationship with the bloc will look
like after the divorce, according to diplomats in Brussels. But
the outgoing prime minister has said those details would be up
to his successor to hash out.
“He’s likely to talk about a number of factors that he
thinks were issues in the campaign, and in the debate,” said
Helen Bower, Cameron’s spokeswoman. “He will reiterate that
Article 50 is a matter for the next prime minister.”
Regardless, his handling of the Brexit saga will be picked
over between courses. While some leaders were impressed with
Cameron’s EU stance over the past few months, and are wary of
being trapped into hasty decisions, others are fed up and feel
let down after he promised victory, diplomats with knowledge of
the talks said Monday.

Empty Chair

On the second day of the summit, Cameron’s chair will be
empty, a striking symbol for the U.K.’s loss of power virtually
overnight. Its appointee to the European Commission, Jonathan
Hill, resigned on Saturday and the country is about to be
stripped of a six-month stint managing EU business due next
year. At least one British member of the European Parliament has
relinquished sponsorship of a key piece of legislation.
After digesting the shocking news, the EU has calibrated
its response to a U.K. departure. The knee-jerk reaction of some
had been that the U.K. should trigger Article 50 as early as
this week. German Chancellor Angela Merkel is among those
calling for a more thoughtful approach, with two EU diplomats
saying the alliance could potentially wait until the end of the
year.

Waiting Game

“We can’t afford an extended waiting game because that
would be bad for the economy of both sides of the EU — the 27
members and Britain,” Merkel said. “But I have a certain level
of understanding if Britain takes some time to analyze things
first.”
Merkel said the U.K. would need to give its official
declaration to exit the bloc before formal negotiations on the
terms of its future relationship can begin. In a joint statement
with her French and Italian counterparts, she urged the EU
summit to “set in motion a process based on a concrete timetable
and precise commitments.”

–With assistance from Thomas Penny, Tony Czuczka and Brian
Parkin.

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Consumer Confidence

Via TDSecurities:

US: Consumer Confidence Rebounds Strongly

·         The headline consumer confidence index surged to an 8-month high in June, up to 98.0 from 92.4.

·         This was a far stronger performance than the market consensus expectation for a far more muted rebound to 93.5.

·         The overall tone of this report was encouraging, pointing to a strong rebound in household sentiment toward the US recovery. This, however, should be short-lived.

US household confidence roared back to an 8-month high in June, climbing to 98.0 from 92.4. This marks the first month improvement in this indicator since March, and it takes the level on confidence back to its highest level since October last year. The market consensus expectation was for a more modest rebound to 93.5. The improvement in sentiment was driven by brightening attitudes toward the present situation (up from 113.2 to 118.3) and future conditions (up from 78.5 to 84.5) improving.

The details of the report, however, were somewhat mixed. There was decent improvement in sentiments toward labor market conditions, business conditions and income prospects. However, spending plans on big-ticket items painted a less encouraging picture, with intentions for spending on autos, homes and major appliances all declining. Inflation expectations also deteriorated on the month, falling to 4.7% from 4.9%, matching the near-decade low watermark for this indicator.

On the surface, this report provides an encouraging glimpse on US household sentiment, however, the guts of the report offers a far more nuanced tone on confidence. The strong headline performance in this report is also out of sync with the relatively downbeat tone of its Michigan counterpart. Moreover, as concerns about the potential fallout from the recent Brexit decision continue to play out, we expect this index to fall back down to earth, aligning it more closely with the Michigan confidence indicator.

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Revised Q1 GDP

Via Stephen Stanley at Amherst Pierpont Securities:

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Some Corporate Bond Stuff

Via Bloomberg:

IG CREDIT: Volume Improves as Spreads Widen Further Still
2016-06-28 09:35:32.303 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $12.7b vs $8.9b Friday, $11.7b the previous Monday. 10-
DMA $12.8b; 10-Monday moving avg $12.9b.

* 144a trading added $1.5b of IG volume vs $1.9b Friday, $1.7b
last Monday

* Most active issues:
* WFC 4.40% 2046 was 1st with client and affiliate flows
accounting for 100% of volume
* C 3.40% 2026 was next with client selling 2.4x buying
* ABIBB 3.65% 2026 was 3rd; client and affiliate flows
took 80% of volume
* CHTR 4.908% 2025 was most active 144a issue with client
flows taking 99% of volume; client selling twice buying

* Bloomberg US IG Corporate Bond Index OAS at 164.7 vs 160.5
* 2016 high/low: 220.8, a new wide since Jan. 2012/150.8
* 2015 high/low: 182.1/129.6
* 2014 high/low: 144.7/102.3

* BofAML IG Master Index at +164 vs +161
* 2016 high/low: +221, the widest level since June
2012/+152
* 2015 high/low: +180/+129
* 2014 high/low: +151/+106, tightest spread since July
2007

* Standard & Poor’s Global Fixed Income Research IG Index at
+222 vs +208
* +262, the new wide going back to 2013, was seen
2/11/2016
* The widest spread recorded was +578 in Dec. 2008

* S&P HY spread at +683 vs +663; +947 seen Feb. 11 was the
widest spread since Oct. 2011
* All time wide was +1,754 in Dec. 2008

* Markit CDX.IG.26 5Y Index at 91.3 vs 87.0
* 73.0, its lowest level since August, was seen April 20
* 124.7, a new wide since June 2012 was seen Feb. 11
* 2014 high/low was 76.1/55.0, the low for 2014 and the
lowest level since Oct 2007

* Current market levels vs Monday, Friday and Thursday early
levels:
* 2Y 0.613% vs 0.558% vs 0.568% vs 0.755%
* 10Y 1.461% vs 1.460% vs 1.509% vs 1.723%
* Dow futures +183 vs -39 vs -497 vs +163
* Oil $47.17 vs $47.71 vs $47.81 vs $49.82
* ¥en 102.15 vs 102.01 vs 103.02 vs 104.83

* IG Bondwrap: Fallout From Brexit Vote Keeps Issuers Away
* June stands at $62.88b
* YTD IG issuance now $865.845b; YTD sans SAS $723b

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More FX

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h10d04bab,1775af9f,1775afa0&p1=136122&p2=fd313f95849e384023da8fb688ebe052>

I’m not sure I have a sophisticated, subtle or clever thought left at this stage. Markets are bouncing, and can bounce further but the clouds on the horizon are dark, and they’re real.
There’s a pattern for Monday mornings to extend moves of the previous week before Tuesday sees everyone take stock. I know a technical analyst who removes Friday afternoon and Monday morning data from his charts to compensate. That’s the context in which we should look at market moves overnight. ZAR, NZD, KRW, PLN and AUD have bounced in FX-land (even the pound is up) and Treasury yields are a couple of basis points higher.

Sterling can bounce to USD 1.35 for example- but the UK has no Government and no plan for the future. GBP/NOK and GBP/SEK in particular are attractive shorts at these levels and more so, on any bounce.

EUR/USD may even drift up towards 1.12 in this environment. The negative economic implications for the UK economy of leaving the EU are clearly understood but there is plenty of willingness to downplay the impact on the rest of Europe let alone the rest of the world. If jobs leave the UK for example some of them turn up elsewhere in Europe, and so on. I think this is wrong: Extricating itself from the EU is damaging for the UK’s economy because it’s so intertwined with the rest of Europe but for precisely that reason, it’s negative for Europe too. Still, EUR/USD could head back towards 1.14 if risk sentiment stabilises for a moment or two.

EUR/USD – can drift back to 1.12-1.14 range

[http://email.sgresearch.com/Content/PublicationPicture/228044/3]

The same is true in reverse of the dollar. It’s no surprise that periods of risk aversion see the trade-weighted dollar rally even as Treasury yields fall, but unless a recovery in risk sentiment is encouraged by a pretty sharp sell-off in Treasuries, the dollar too, will fall back. And Treasury bears have, as the saying goes, been punched in the face so many times that they don’t really have much of a plan left any more. There will be dip-buyers in bond-land.                                                                                                                                                    The debate rages on between those who think that ‘lower for longer’ Fed policy is a panacea for all the global economy’s ills (except, perhaps, Brexit) and those who think this particular drug has lost its power. I just think that global growth is too close to stall speed to encourage yield-hunting in the FX market as a long-term strategy, but that won’t stop AUD, NZD and CAD doing better today, along with all the major EM currencies.                                                                                                          I’ll reiterate that this is short-term relief, and pointing at the USD/CNY rate, I’ll also re-iterate a preference for oil-supported currencies (CAD and RUB at two extremes) over China-sensitive ones (eg, NZD and ZAR).

The dollar and TIIPS may have to re-couple

[http://email.sgresearch.com/Content/PublicationPicture/228044/4]

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FX

Via Marc Chandler at Brown Brothers Harriman:

Dollar Softer as Calm Returns to the Markets

• A measure of calm has returned to global financial markets
• The Bank of England allotted GBP3.1 bln in a special ILTR liquidity operation
• The Brexit result has added to the fog surrounding Fed policy
• S&P cut its UK rating to AA with a negative outlook; Fitch did the same
• Brazil’s central bank releases its quarterly inflation report; EM remains vulnerable

The dollar is mostly softer against the majors as a measure of calm returns to global financial markets.  The Norwegian krone and the Antipodeans are outperforming while the yen and Swiss franc are underperforming.  EM currencies are mostly firmer.  ZAR and PLN are outperforming while CNY and INR are underperforming.  MSCI Asia Pacific was flat, with the Nikkei rising 0.1%.  MSCI EM is up 0.9%, with Chinese markets rising around 0.5%.  Euro Stoxx 600 is up 2.4% near midday, while S&P futures are pointing to a higher open.  The 10-year UST yield is up 4 bp at 1.48%.  Commodity prices are mostly higher, with oil up 3% and copper up 2%.  Gold is down over 1%.

A measure of calm has returned to global financial markets.  Yet as long as the terms and timing of Brexit are unknown, these markets remain vulnerable to renewed selling.  Sterling has felt the most heat, with cable weakening nearly 4% Monday to go on top of the 8% loss on Friday.  Today, however, cable is up nearly 1%.  

The Bank of England allotted GBP3.1 bln in a special ILTR liquidity operation.  Banks bid for GBP6.3 bln.  It was the third long-term repo operation held since the Brexit referendum, as the BOE attempts to keep UK markets functioning.  Demand for funding has risen, as the BOE allotted only GBP370 mln last week.  BOE Governor Carney chairs a meeting today of the Financial Policy Committee, and surely he will discuss what needs to be done to maintain the safety and integrity of the UK financial system.  UK bank stocks have been hit particularly hard since the referendum, though they are up nearly 5% today.    

Meanwhile, Labour leader Corbyn faces a vote of confidence today within his own party, as the UK political outlook remains muddied on all sides.  Betting markets suggest that Theresa May is the new favorite to become the next Tory leader.

While it will take some time to gauge the economic impact of Brexit on the UK economy, the data had already been softening ahead of the vote.  Today, CBI reported softer retail sales volumes in June.  Orders placed improved slightly, but remains in negative territory.  What’s more important will be the Q3 data in the coming months.  As it is, the short sterling market is already pricing in BOE easing this year.    

The Brexit result has added to the fog surrounding Fed policy.  Most had expected the Brexit vote to fail, allowing the Fed to resume hiking rates at the July 27 FOMC meeting.  Instead, markets have now adjusted Fed expectations the other way, with the August Fed funds futures contract pricing in chances (albeit rather low chances) of a cut in July rather than a hike.  Tonight, the Fed’s Powell speaks, and it will be hard for him not to address the Brexit vote.

S&P cut its UK rating by a full rung to AA with a negative outlook.  This shouldn’t be a total surprise, but the move seems a bit aggressive given that we don’t yet know the real impact of Brexit.  So, the UK has now lost its last AAA rating.  Moody’s first moved it to Aa1 back in February 2013 while Fitch moved it to AA+ back in April 2013.  Fitch then cut its rating by a notch to AA with negative outlook late Monday afternoon.  A Moody’s downgrade seems like a lock, since its last move to Aa1 was made back in early 2013.  Things now look worse, don’t they?  

Brazil’s central bank releases its quarterly inflation report.  This will be the first one prepared under Goldfajn, and will be very important in setting the tone for H2.  We think rising price pressures and a weaker BRL could prevent a cut at the next COPOM meeting July 20.  Indeed, Brazil reports June IGP-M wholesale inflation Wednesday, which is expected to accelerate to 12% y/y from 11.1% in May.  Yet the real is been pretty resilient in recent days.  

There’s not much we can say about EM beyond highlighting the obvious dent to risk sentiment.  With UK Article 50 talks likely to stretch out for a while, this points to a protracted period of risk aversion that will likely prevent EM from getting much traction.  But rather than seeing sharp violent moves in EM FX, we think we see a protracted slow bleed.  Furthermore, we think that the downside risks to global growth will likely keep EM central banks in dovish mode.

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Looking For Wider Corporate Bond Spreads

Via Bloomberg:

Morgan Stanley, UBS tell clients to keep money in cash
U.S. junk, investment-grade bonds seen extending declines

Morgan Stanley and UBS Group AG are telling their clients to brace for deeper losses in U.S. credit as a result of the U.K. vote to leave the European Union.

While the “leave” camp’s win in the U.K. referendum has already rattled markets and caused U.S. corporate bond spreads to surge the most since the European sovereign debt crisis, credit strategists at the two banks say the worst is yet to come. Bonds aren’t cheap enough to warrant taking the risk that the market volatility isn’t temporary.

“Despite the urge to step in and buy U.S. credit at modestly wider levels than a few days ago, we recommend patience,” Morgan Stanley strategists led by Adam Richmond wrote in a note to clients Monday. “While the full impact of the U.K. leave may not be known for some time, the U.S. economy is not in a position to withstand a large shock.”

After the vote, frazzled investors dumped U.S. corporate bonds with global assets, with spreads on investment-grade and high-yield debt widening 14 basis points to yield 2.48 percentage points more than U.S. Treasuries, according to Bank of America Merrill Lynch index data. Corporate bond spreads haven’t spiked that much in one day since October 2011 — when investors were concerned that sovereign debt turmoil in Europe would worsen and infect the banking system.

UBS’s Stephen Caprio is advising investors to resist deploying new cash to buy bonds on the cheap for now as Brexit increased the likelihood of a U.S. recession to 34 percent. That along with a stronger U.S. dollar, low oil prices and banking sector stress could upend vulnerable credit markets. In that case some high-yield and investment-grade companies may struggle to access debt markets, according to UBS.

“We do not believe investors should be buying Friday’s dip in credit yet,” Caprio wrote in a note to clients. “It is not often that an exogenous shock has hit so late in the credit cycle with central banks already at the zero bound.”

The U.S. economy and company creditworthiness are already weak enough that it may not take much to spark a deeper sell-off in corporate bonds, according to Morgan Stanley’s Richmond.

There were signs economic risks were rising even before the Brexit vote: U.S. corporate profits are down 15.5 percent from a peak in the fall of 2014 and business investment has deteriorated, Richmond wrote.

What’s more, companies — even large blue-chips — are about the least creditworthy they’ve ever been as they’ve borrowed rampantly in the face of weak earnings, according to Morgan Stanley.

“A catalyst is here,” Richmond wrote. “The worry that global growth is weakening and central banks can’t do much about it, which was prevalent earlier this year, won’t be far behind.”

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Next Stop on 10 Year Note 1 Percent and a Look at Highest Treasury Coupons Ever

This Bloomberg story cites two market pundits and prognosticators who envision 1 percent 10 year yields and 2 percent 30 year bond yields by year end. To quote the Bard of Forest Hills, Paul Simon, “Who am I to blow against the wind”? Every once in a while in my blogging career I post what I recall are the highest coupons ever issued by the Treasury in any given sector. Every coupon that follows was issued in the second half of 1981.

The highest coupon on the 2 year note was on the 16 1/4 Aug 1983. The 3 year year note was the 16s Nov 1984.  In that bygone era the Treasury had a 4 year note on the cycle and the winner is/was the 15.875 Sep 1985. The 5 year note (and I traded many of these when they rolled inside of 2 years) was the 16.125s Nov 1986. The 7 year note was the 15.375s Oct 1988. The 10 year note was the 14.875s of August 1991. In those days the Treasury also sold 20 year bonds and the winner here is the 15.75s of November 2001. How is that for a coupon. Finally, the fattest coupon on a Long Bond was the 14s of Nov 2011. The previously mentioned 20 year bond with the 15.75 coupon auctioned in October 1981. The Long Bond auctioned in November. The WI  trading period was much longer back then and the issue opened trading at 15.5 percent and rallied to gain a 14 percent coupon.

So that is a little walk on the wild side of high coupon Treasuries.

Via Bloomberg:

Susanne Walker Barton
SuziAnn2
Brian Chappatta
BChappatta
June 27, 2016 — 7:30 PM EDT

U.S. government debt has returned 5.8 percent in 2016
Best start to year in two decades seen as just the beginning

The $13.4 trillion U.S. government bond market is on the brink of history.

Ten-year Treasury yields plunged for a second day Monday, closing just 0.06 percentage point from their all-time low of 1.379 percent. Even with bonds off to their best start to a year since 1995, two of the market’s most-experienced observers say the rally is only getting started.

Scott Minerd, chief investment officer for Guggenheim Partners, sees yields on the benchmark securities plunging to 1 percent by the end of the year, dragged down by record low borrowing costs around the world. And Gary Schilling, a 50-year veteran of the bond market, said the impact of Britain’s exit from the European Union on the global economy is a wildcard that will continue to push yields lower.

“We don’t really know the depth of Brexit,” said Schilling, president and founder of Springfield, New Jersey-based research firm A. Gary Shilling & Co. “As low as Treasury yields are, they’re still higher than most comparable developed countries.”

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The fallout from the U.K.’s decision to exit the European Union has boosted sovereign bonds from Germany to Japan, adding billions of dollars more in negative-yielding securities to the global debt market and fueling demand for comparatively higher-yielding Treasuries. While investors are set to pay the most ever for America’s debt, it also means lower borrowing costs for the government at weekly bill, note and bond auctions.
Forget Hikes

The bonds are off to the strongest start in 21 years, with Bank of America Corp.’s U.S. Treasury index returning 5.8 percent in 2016, propelled by the U.K. vote last week.

Even with U.S. 10-year yields close to all-time lows, the securities still pay more than 15 of 25 developed nations tracked by Bloomberg. The world’s largest economy boasts growth exceeding that of Europe and Japan, adding to investor appetite.

Many of the same forces driving Treasury yields lower are also limiting the Federal Reserve’s capacity to raise interest rates. The market-implied probability of a rate boost by year-end was 8 percent Monday, futures data compiled by Bloomberg show. That’s down from a 50 percent chance assigned on Thursday before the U.K. vote.

“Forget any idea of any rate increase,” Shilling said. “The odds of a rate decrease are increasingly likely. The next move by the Fed would be down, not up.”

Shilling also expects 30-year Treasury yields to drop to a record low 2 percent by year-end, from 2.26 percent Monday.

A downturn in inflation expectations also looks set to keep a lid on yields. A market measure of average inflation expectations over the next 10 years fell to 1.37 percent Monday, the lowest since February, as oil posted the biggest two-day loss in four months.

“You’ve seen global inflation expectation outlooks fall dramatically,” said Michael Lorizio, a Boston-based senior trader at Manulife Asset Management, which oversees about $325 billion. “Where that would signal the greatest ability for a major shift down in yield would be the 30-year part of the curve.”

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Cogent Commentary

This one is from my friend and former colleague Steve Liddy. He regularly writes about the markets.

Via Steve Liddy:

The thing I’m watching, for the moment, is the collateral market. With UK banks down 30+%, from their Thursday closes, and other global banks suffering in kind, I remind you of what really forced Bear, Lehman and Countrywide out of business…short term funding issues: the inability to fund themselves.

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