Notes From Underground: Question of the Day–Which 2-Year Note Yields More, Germany or Japan?

The world spins and investors get dizzy. Today the German 2-year note is yielding less than the Japanese two-year! Think about that for a moment as an indicator of the insanity that has enveloped the world. The Germans may well be the best credit in Europe but at this moment the German people are on the hook for a great deal of European DEBT so the SCHATZ is trading at a level that is devoid of reality. The reason for the SCHATZ BID may be a result of the need for high quality collateral to secure REPO borrowing or it may be a signal that citizens of the DEBT-STRESSED PERIPHERIES have grown tired of their domestic banks and are parking huge amounts of money in GERMAN SOVEREIGNS … another example of GRESHAM’s LAW.

Whatever it is that lurks in the minds of investors it seems only the SHADOW BANKING SECTOR KNOWS. On a day where yields on HIGH QUALITY GOVIES dropped amid investor flight to safety, Spanish and Italian 10-YEAR YIELDS were the target of speculators and hedgers as rates were up more than 20 BASIS POINTS. All asset classes were being sold as storm warning flags were raised around the globe and equity markets dropped more than 2%. GOLD WAS BEING SOLD ALSO, BUT AS EUROPE “CLOSED” IT SEEMED THAT NERVOUS INVESTORS DEEMED GOLD TO BE A SAFE HARBOR. The other metals stayed offered as COPPER AND PLATINUM both closed down almost 2%.

The GOLD will be interesting to watch as the RISK-OFF crowd has been liquidating all assets, but if the GOLD believes that BERNANKE and other CENTRAL BANKS will push the PANIC BUTTON ON LIQUIDITY CREATION, THEN GOLD WILL RALLY AGAINST ALL FIAT CURRENCIES. This is where the present situation lies: The EQUITY MARKETS ARE NERVOUS ABOUT THE LACK OF EUROPEAN GROWTH PROMOTING THE NEXT LEG OF A GLOBAL RECESSION. Again, the world has been floating on a sea of liquidity, which has prompted investor COMPLACENCY. Has the complacency been replaced by FEAR?

Too EARLY TO TELL BUT THE SPARK OF UNCERTAINTY MAY FORCE THE FED OUT OF THE SHADOWS AS A NEW BOUT OF DELEVERAGING GAINS MOMENTUM. CHAIRMAN BERNANKE AND PRESIDENT DRAGHI ARE VERY AWARE THAT IT IS NOT ONLY MONEY THAT HAS VELOCITY BUT ALSO THE DELEVERAGING PROCESS. BE ON THE ALERT FOR AN IMF ANNOUNCEMENT ABOUT A EUROPEAN BAILOUT AS THE FRENCH ELECTION IS LESS THAN TWO WEEKS AWAY. A MAJOR IMF LIQUIDITY ADD WOULD CAUSE THE RECENT SHORTS TO COVER … just making traders aware of the potential risks as the POLITICOS MANUEVER IN THE SHADOWS.

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6 Responses to “Notes From Underground: Question of the Day–Which 2-Year Note Yields More, Germany or Japan?”

  1. Olaf Hansen Says:

    Interesting; do you see any chance of the Treasury going the route of issuing floating rate notes as an exit strategy as detailed in this Zerohedge piece ? http://www.zerohedge.com/news/if-1951-accord-any-indication-treasurys-imminent-launch-floaters-will-be-signal-get-out-dodge

  2. yra Says:

    Olaf–I read the same piece and saw this about a month ago–really need to investigate more as to why and will this replace TIPS

    • Kevin Says:

      A few days behind here – an excellent article Yra. The FRN’s would only provide investor protection to the extent that the Fed funds rate (whic in turn determines TB yields which would be the basis of the FRN rate) responds to inflation in the future. How long will the current negative real yields be maintained? The FRN holder has to believe a return to “normalised” real yields is likely. The TIPS holder, however, has to believe that the reported inflation data will be reliable in the future. Both could be disappointed! (but if I had to choose the FRN holder seems to have a higher chance of disappointment as the inflation fudge gets him as well).

  3. arthur Says:

    very interesting article, a lesson for Europe? Winners of Japan’s lost decade… http://www.ft.com/intl/cms/s/0/1ecac5e0-82fb-11e1-ab78-00144feab49a.html?ftcamp=published_links/rss/management/feed//product#axzz1rmgPMArs

  4. yra Says:

    Arthur–totally different mind set .And Japan had savings to fall back on which we valuable in times of DEFLATION–not like in the debt ladened western consumer—Inflation will be the “solution” in the West in order to bail out the debtors

  5. arthur Says:

    I see, great points…thanks!

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