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Martin Sosnoff

Murphy’s Law Part II Load Up In Treasuries

When I talk to bond traders, their sole focus is whether the FRB will drop rates a quarter point day after tomorrow. Nobody cares about spreads in 2-year VS 10-year Treasuries. 

It’s narrowing but still negative by 34 basis points. 


Nobody cares that a prime mortgage will cost you 7% in interest. Buyers can take it just so long as home prices hang in. Traders tell me I’m acting like an academic, angry about whether 10-year Treasuries yield 4.26%. Two-year Treasuries now yield 4.6% but nobody cares. It's high variance counts for something. BB corporate bonds yield nearly 7%. Nobody cares as yet. . 


I used to borrow money in the form of a 9% loan yield. Just so long as I thought I could turn a trick, I stayed invested. But, the inherent market volatility was a fact of life. First sniff of fish I cut back! Leverage had become a dirty word. 


In the high interest rate setting I see as  prolonged, price-earnings ratios get compressed. More money flows into 2-year Treasuries. 


But,  charts can’t isolate inflation forces. You could have the history of yields on your side, but be wrong for years and years. All you can say is Treasury yields range widely. The penalty for being wrong in pricing tech houses ranges up to  50% overnight. Nvidia is the exception. Its good earnings surprised everyone. 


Before calling the next recession around the corner, you need to wield a meat ax when you hear mumbles like “a 10% chance of recession.” Assume the real risk is 50%. When you hear a 50% chance, you are probably in the eye of the hurricane. When everyone conjures recession is at hand. If brave, I assume bad times are about over then and implement a buying program.


My old friend, Barton Biggs, used to say about foreign markets is, “when the locals panic, I jump in.”Money managers know what’s what on the courage factor. Don’t expect an economist to give you a shove back in. That’s not in his list of “buys”.


Anyways, to hell with Murphy and his list of laws. I did buy 

General Motors as a sound value play, but it sloughed off next day. I bought some more. I should retire if I drop some change here on this baby. 


My growthies embrace Microsoft, Amazon and Alphabet. I think I understand their fundamentals,  but they are pricey, too, not in the clouds. 


At my back, I hear a strident voice. “The yield curve kid.  If you can’t rationalize our negative spread, you don’t belong in stocks and bonds.” Change is coming. The yield curve has begun compressing. 


Good ole days, 1960ies, I’d run 150% long with a credit line from money brokers at 9% interest, marked-to-market daily. I played airlines, banks and prime growth stocks. The FRB was my enemy,  bumping up margin requirements along with money market rates.


Past 5 years 10-year Treasuries showed an upward bias in yield to 4.3% from under 1%.  Is this what the Bulls are hoping for, a sizable shuffling in yields?  Recession would do such a trick.


Past Saturday, only a hair’s breadth separated Trump from elimination. 


That our country accepts without a murmur Our Secret Service’s gross incompetence in safe-guarding our leaders. This started with Abe Lincoln’s shot to the body.


The current leadership of the Secret Service needs to be rid of its incompetence. Only a hair’s bread came between Trump’s on site elimination. Our candidates deserve better. 


The market’s pundits face much to ponder. Let them ponder. First, the FRB is likely to make money easier, but should we care much?


A better question is what is the meaning of the negative yield curve between 2-year and 10-year Treasuries? Nearly a year ago the negative spread was as much as 50 basis points. Now, the spread has contracted to 35 points. Nobody cares. Except me. I care because this is a new, prospectively bullish change in trend.. Ten year paper should be yielding more. The bond market is telling me to short the country and sell short another batch of bonds. Happy to do so.


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