The Capital Spectator: THE SPREAD SHALL SET YOU FREE

One can read too much into changes in yield spreads. The ten year treasury and the yield curve are both forecasting low inflation expectations. However, the widening spread between junk and treasuries is probably only the unwinding of hedged trades. The hedgers had pushed the spreads to abnormally low levels which simply could not last.

Hedgers have sold the 10 year treasury short and bought junk. They have been earning a yield spread and have hoped that the credit grade on the junk would improve or that the corporation would buy back the junk, not an unreasonable assumption in a strong economy. Companies with cash to spend have tended to buy back stock not retire bonds. The hedgers are now trying to unwind and there are too many people trying to go out the door at the same time. To unwind, the hedgers are buying 10 year bonds and selling junk.

Stocks are off to the races. It could be a simple move to use some of that leverage to participate in the stock rally. Why sit on a spread trade when the market is hot?

BUY THE BIG BULL BOOM BUBBLE BEFORE THE FROGS BOIL!