Daily Bullets……for May 28, 2014

·        Surprise in bonds !........Big story of 2014: bond yields are hitting new lows for the year with 10-year Treasury yield now at 2.44%, a decline in yield of about 20% since the beginning of the year.

What’s the point? The decline in bond yields has surprised investors this year many of whom believed interest rates would rise and were positioned for that. It is important because bonds are a major asset class and bond yields are important determining valuations for financial assets. The reasons for recent the decline in yield include: 1) slow growth in Europe, 2) belief that growth in China is slowing, and 3) increasing belief the ECB will lower interest rates next week. Investors are reacting to the recent news pertaining to global growth and grappling with fully understanding the implications of sustained slower growth. Link: http://money.msn.com/top-stocks/post--treasury-yields-dip-to-new-2014-lows

·        More “limbo”…trading activity reflects economy……Stock and bond market volatility and interest rates are unusually low. This is a reflection of the economic backdrop and is resulting in lower trading profits for investment banks.

What’s the point? As a fundamental shop, we would normally not be all that interested in day-to-day trading activity. What is interesting currently though, is the fact that “fundamentals” are having a noticeable impact on trading volume and volatility primarily because traders are confused about the direction of interest rates and the economy, both of which affect valuation and earnings, the two primary drivers of stock prices. Is this a problem? Sort of, but more importantly, it may be reflecting confusion in the  market over Fed policy, interest rates, the direction of the global economy and inflation, all of which has important implications for the markets and investment strategy. It may also be indicative of what may be lower secular returns on financial assets. Link: http://www.bloomberg.com/news/2014-05-28/goldman-s-cohn-says-inactive-trading-environment-is-abnormal-.html