SOS central banks wanted!

It is very troubling for the Federal reserve to see a rise in real interest rates because it leads to a rise in the cost of capital for corporations, putting pressure on overleveraged zombies. The move up in real rates has been substantial in the past few weeks. We saw 10-year TIPS at -1% in mid-February, going to -0.65% in a matter of days. At the same time, the yield on 30- year TIPS has gone back to positive territory. Unfortunately, this has led to a slight tightening of economic conditions, which could become more pronounced as real rates continue to rise.

2. Correlation between yields and junk has turned negative from this week, pointing to a bigger selloff ahead

It is about to become a challenging market for risky assets. While junk bonds have benefited from a strong risk appetite since the beginning of the year, we may be about to see the tide turning. This week indeed had seen the correlation between Treasury yields and Junk bond returns turning negative, exactly as it happened during the 2013 Taper Tantrum when yields were rising, pointing to the fact that it may just be starting to get uncomfortable for risky assets. To learn more about this click here. 

Reasons why the European Central Bank should step in:

1. The periphery is just about to get into troubles

The ECB's monetary policies were doing well until the reflation trade in US Treasuries provoked a spike in European yields. Although many European sovereigns yields are still trading at historic low levels, one cannot ignore other important signals. Yesterday's Italy 5 year BTP auction was exceptionally weak, registering the lowest bid-to-cover ratio since June.  At the same time, Greeks government bonds fell by more than 3% in just a month. This is about to bring back reminisces from the periphery crisis, which cannot happen while there is no clear path to recovery, and the economy lacks fiscal stimulus.