Wall of Money

May 6th, 2014 7:40 am | by John Jansen |

This is an excerpt from the morning piece of William O Donnell at RBS Securities . He places the decline in spreads and the search for yield in historical context.

Via RBS Securities:

On the first point, the global ‘wall of cash’ is pushing into nearly every market these days. For example, the IG cash index (spread) is down to 100bp, down from 237bp at the end of ’11 and from 152bp in the middle of last year. The high yield cash index spread has fallen from 704bp at the end of 2011 to 386bp as of last Friday. Spain’s 10yr yield is now inside of 40bp over US Treasury 10yr yields. Global investors appear to be seeking yield in all liquid fixed income markets, despite risks, and this end-user demand is slow-roasting long term shorts who leak carry, roll and total return every day. Note too that US Treasuries remain quite cheap to other safe haven debt markets, putting a soft cap on US yields by channeling accommodative monetary policy overseas (Japan and Europe) back into our market which is already positioned/prepped for domestic policy tightening. No wonder markets seem so unsettled. On the second point, rate ranges are being reinforced by Street desks that are lugging around long Gamma positions graced upon them by real$ sellers looking to boost total returns by collecting premium. Bull or bear signals may work for a few days before correcting because the trend-of-the-moment is still sideways, thanks to the predictable actions of delta-hedgers. In this light, the best trade may be no trade until we have a clearer view about what the US economy looks like, free of weather impacts and the manacles of dealer exposures to short-dated volatility. It could be a while and we will attempt to be patient, waiting to be beaten over the head by a change of conditions. It is what it is…

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