Even as US yields have been climbing out of their slumber, credit spreads have continued their march inwards:
In this version of reality, QE is the panacea that will take us back to early noughties. The troubles in the Middle East and Europe are just background noise. Higher commodity prices won’t derail the recovery. China remains intent on plugging the global funding gap – by selling more TV’s to the leveraged US consumer presumably.
So what then has the VIX been putting in its pina colada? The recent pop may be an aberration or it may be signalling something else.
I’ll back the VIX as a leading indicator on equities. It has a reasonable track record in anticipating sell-offs, so we should pay attention to the breakdown in the S&P500 as implied by movements in the VIX:
Though of course, we still have ~$200bn billion of POMO (not including maturing issues) to contend with. Even with the PIMCO factor, that leaves plenty of scope to soak up the ~$300 billion of net Treasuries that will be auctioned through to June.
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