Wednesday, May 14, 2014

Bond Yields At New Lows

Stocks are off to a weaker start this morning, but not meaningfully so.  Some of this was just weakness from overseas markets this morning.

The more interesting action is what is taking place in the bond market.  Today's PPI report showed that core producer prices were up more than expected, rising 0.5% last month.  On a year basis the PPI is up the most in 2 years.  But that didn't put any upward pressure on bond yields whatsoever.

Weakness in other economic data in the US could be a culprit, as well as talk in other parts of the world that deflation is still a threat.  As such, continued demand for Treasuries has pushed yields on the 10-yr Note down to 2.55%.  These are the lowest yields investors have seen since October 2013.  We are still expecting strong growth in 2H14 and for rates to have a move higher.  Recall that last year rates moved lower into May but had a big spike thereafter.

Asian markets were mixed overnight.  Reports are out saying the Peoples Bank of China is making a push with lenders to increase mortgage lending in an effort to stem the slowdown in the real estate market.

Europe's markets are lower today.  Germany's Bundesbank president said he is not in favor of QE.  And the Bank of England said rate hikes are likely to begin around Q2 of 2015, which is later than most participants had expected due to recent economic strength in Britain.

Oil prices are higher to $102.35 and gold prices are back above $1300 to $1306. 

The VIX is back at very low levels near the 12.0 level.  Historically when volatility gets this low it has usually been a good time to buy some protection in the form of put options.

Trading comment: The S&P 500 made a new closing high yesterday, and the Nasdaq and mid-cap indexes are trying to stay above their 50-day averages and play catch-up.  Biotechs are higher today while the overall market is weaker, and that is a good sign.  It still looks like the correction has run its course for the time being.  Seasonally, the summer months are often a time when we see a correction in the market.  But there could be a window where the market continues to push into new high ground first.


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