A funny thing happened on the way to serious discussion about tapering off Quantitative Easing sometime late this year: the 10-year Treasury Note rallied strongly from a yield over 2% all the way down to 1.65%, only 25 basis points from its lifetime lows hit last summer.
The bond market is sending a big message. But what is it?
a) QE will really continue well into 2014 and keep the long end of the yield curve subdued with the short end.
b) Deflation is still a much bigger threat than inflation and two groups of influential people know it: the doves on the FOMC and big bond market investors. And apparently gold investors were the last to find this out as many have been forced to flee their monetary debasement hedge.
c) US equities are poised for a correction and so money is hiding out in the safety of Treasuries.
d) This is mostly a function of the Bank of Japan (BOJ) redoubling its QE reflation efforts and forcing expanded new carry trades where you can borrow (sell) yen and invest in (buy) higher yielding currencies and their assets.
e) All of the above, or something else?
Forget the "great rotation" nonsense that went around in the past six months. If equities really are the place to be and the economy is steadily improving, why is there so much demand for safe-haven instruments yielding 1.65% for 10 years?
This is an important question to have some clarity about because it can frame your outlook on the global economy and the vibrant US stock market. So let me hear from you!