Check this out.
The Greek 5-year now trading through the U.S. 5-year yield. Absurd.
Italian 10-years now through the U.S., Portugal 10-year is trading 140 bps through the U.S.? WTF?
We laugh when the Flat Earth Yield Curve Society asks, “what are the bond markets telling us?”
Global bond markets are distorted and suffer sovereign yield scarcity due to global central banks becoming the largest buyers. Foreign central banks and the Federal Reserve now own/hold almost 50 percent of the outstanding U.S. marketable notes and bonds. This is the “quantum mechanics” of the new bond market, folks. The underlying reality of markets are not the same as we used to understand them.
All Markets Are Distorted – Beware Of Reflexivity
If the risk-free interest rate is distorted, then all assets are mispriced.
Moreover, given the increasing feedback between markets and the economy, it is not inconceivable the Flat Earth Yield Curve Society fails to discount the distortions and convinces itself and the real economy the yield curve is signaling an imminent recession. Capital investment and consumers then run for cover and it’s game on — a self-fulfilling recession. Soros’ Reflexivity on steroids.
Of course, a recession is going to come someday but who knows when, and we sure wouldn’t trust the distorted bond market to tell us anything about anything.
Don’t make the mistake that one prominent market strategist made when central banks were scooping up sovereigns faster than my 12-year daughter used to do with ice cream at 31 Flavors,
We’re in a depression. That is what the bond market is telling us. – GMM, September 2010
Someday this will end ugly.
Global Macro Monitor 