Tightening Credit Markets
Daylight extends a little further into the evening with each passing day. Moods ease. Contentment rises. These are some of the many delights the northern hemisphere has to offer this time of year. As summer approaches, and dispositions loosen, something less amiable is happening. Credit markets are tightening. The yield on the 10-Year Treasury note has exceeded 3.12 percent.
A change in pace: yields are actually going somewhere. There is a fly in the ointment for treasury bears though: the net speculative short position in futures across the yield curve is seemingly establishing new record highs every week. While this is not bullish for treasuries per se, it definitely makes yields vulnerable to a sharp pullback. The question is what might cause such a pullback. Our guess would be that either "unexpected economic weakness" will enter the scene, or crisis conditions in emerging markets will worsen and eventually spark "flight to safety" behavior.
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