The Bond Market Explained Part II

By EconMatters

 

 

Addendum Needed

 

Since so many people are still slightly confused about how all the pieces come together in this move lower in yields, we feel the need to add some follow-up commentary to our previous article entitled “The Bond Market Explained for CNBC” on the subject which should help investors better understand the behind the scenes dynamics of the bond market.  

 

Filling in the Details

 

So the High Yield Carry Trade is what has brought the 10-Year down to the 2.62% area, Hedge Funds started realizing what was going on in the Bond market, and started getting involved when yields were around 2.8%, but they are just jumping on the tails of the High Yield crowd with the size required to move this market 50 basis points.

 

Once we settled into the 2.62% area hedge funds made a run for the 2.58% area lows, then covered and we were back up around 2.65% yield. From there European Bonds started rallying in price, going down in yield on the belief that Mario Draghi was going to do some kind of stimulus program involving bond buying, investors wanted to front run this event, this led US Bonds to also rally in price and go down in yield which is the move down to 2.47%, then the traders covered and we retraced back to the 2.56% area yield. 

From there traders waited until the econ news came out on Tuesday where yields rallied, and then with no econ data to worry about made the next push down to the 2.43% area on Wednesday in a relatively light volume trading environment. This is straight out of the trend trading handbook, and traders have yet to cover this latest push down hoping for additional profit with protective stops in place. 

 

Make no mistake this is just a trade for these folks with no long-term conviction regarding where bond yields should trade relative to the economic fundamentals. These same traders will be pushing in the other direction in a couple of months; this is how momentum trading works these days.

 

Market Moving Events Next Week

 

There is economic data on Thursday with GDP revisions and Jobless Claims numbers, but relatively speaking, next week is where the rubber meets the road on this trade. Hedge Funds are piling into this trade trying to push some technical areas in a light volume week, see where yields end up next Friday for any commitment to this trade by Hedge Funds. 

 

 

My guess is that there is major covering or closing out of positions by the end of next week similarly to how the Hedge Funds all ran out of the Natural Gas trade, sending NG Futures down two bucks in two days as nobody wanted to take delivery of said natural gas in their largely paper world. 

 

Lots of Stops Protecting Profits

 

Therefore, to sum up the High Yield chasing environment fueled via Low Interest Rates for Borrowing are the reason all rates are this low, but this last move down in bond yields has been due to front-running the ECB decision on June 5th, and hedge funds piling in as they always doing smelling blood in a hot market for technical damage. 

 

As an aside, these aren`t high yields all things considered, but high relative to essentially zero percent borrowing costs once you factor in the kind of leverage being used in this trading strategy.

 

It might be worth pointing out that the bond market is tightening like a coiled spring and can explode higher in yields an easy 20 basis points at the drop of a hat, look for the ECB Meeting or the USEmployment Report to be a potential catalyst next week!

 

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10Y Treasury Yield Hits 2.40%

It seems shorts keep covering and the Chinese keep buying (through Belgium of course – as they sell CNY, buy USD, and grab the extra yield on Treasuries). Despite stocks relative stability, 10Y yields have just hit 2.40% for the first time in over 11 months (as USDJPY broke down). It seems this morning’s dismal GDP print was just enough to confirm the growth/inflation slowing meme (in bond investors’ minds) and the yield curve is flattening even further…

10Y at 11 month lows at 2.40%

 

Led by USDJPY

 

As the divergence grows…

 

Why are they buying Treasuries? because they offer great yield pick up – unbelievably…

 

Charts: Bloomberg




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Gold To See “Massive Shortages” and “Typical Investor” Will Not Be Able To Get Bullion – Rickards

Today’s AM fix was USD 1,254.00, EUR 921.04 and GBP 749.82 per ounce.

Yesterday’s AM fix was USD 1,265.25, EUR 928.83 and GBP 754.52 per ounce.
Gold fell $6.20 or 0.5% yesterday to $1,259.30/oz. Silver remained nearly unchanged at $19.04/oz
 



Gold extended losses to a third straight day yesterday and is down over 3% in three sessions.  Gold bullion in Singapore traded sideways prior to a bout of concentrated selling in late trading in Singapore (0615 BST) saw gold quickly fall from $1,258/oz to $1,252/oz prior to a slight bounce back to $1,254/oz.

It fell to 16 week lows, possibly due to slightly weaker physical demand in top buyer China and technical selling.

In China, gold premiums ticked slightly higher to $2 to $3 per ounce. They have remained roughly the same since before the price drop, which suggests demand in China has not picked up on the price falls.


We are bearish in the short term and technically, gold is vulnerable to further falls. Potentially to test what appears to be a double bottom between $1,180/oz and $1,200/oz. Gold is particularly vulnerable in the very short term, in other words, today, tomorrow and early next week.

Gold in U.S. Dollars, Daily, 1 Year – (Thomson Reuters)

It is also worth considering seasonal trends and in recent years, June is one of the weakest months for gold. Gold’s five year and ten year average performance in June is negative. We will look at this in more detail tomorrow.

While gold is vulnerable technically to further falls, it’s 14-day relative strength index (RSI) has dipped into very oversold territory, at 28.9 currently.

This morning Russia, Belarus and Kazakhstan signed the historic Eurasian Economic Union which will come into effect in January 2015. “The just-signed treaty is of epoch-making, historic importance,”Russian President Vladimir Putin said.

The Eurasian Economic Union expects Armenia to join within a month, Kyrgyzstan within a year.

Cutting down trade barriers and comprising over 170 million people it will be the largest common market across the ex-Soviet states. The troika of countries will cooperate in energy, industry, agriculture, transport and monetarily.


Special Notice Regarding Reduction In GoldCore Premiums: Gold Bars Reduced To 1.6% Premium – Click Here

“Massive Shortages” In Gold Coming and “Typical Investor” Will Not Be Able To Get Bullion – Rickards


Financial expert, Pentagon insider and bestselling author James Rickards has warned that “typical investors” may not be able to acquire physical gold when prices begin to surge hundreds of dollars a day as “massive shortages” will take place.

In another fascinating interview, this time with the always worth a watch Greg Hunter, formerly of ABC and CNN and now of USA Watchdog, Rickards said that gold will become the preserve of the “big guy” in the form of sovereign wealth funds and central banks.

This is something we have warned of since 2003. There is another risk in the form of ultra high net worth individuals (UHNWIs) in Russia, China and elsewhere also attempting to corner the physical gold and silver markets.

In the 1970’s, the Hunt Brothers made the mistake of not accumulating enough physical silver outside the reach of the U.S. authorities. Some billionaires today will likely not make the same mistake.

Rickards latest book, ‘The Death of Money’ predicts “the coming collapse of the international monetary system” and is being very well received. In recent days alone, Rickards has conducted a huge amount of media interviews with most leading financial networks.  

One of the signposts of the coming collapse of the international monetary system is countries like Russia declaring it will no longer use the U.S. Dollar as a reserve currency in international trade.

Rickards explains, “Putin said he envisions a Eurasian economic zone involving Eastern Europe, central Asia and Russia.  The Russian Ruble is nowhere near ready to be a global reserve currency, but it could be a regional reserve currency.”


Rickards is surprised at how fast the economic situation is unfolding.  Rickards says, “If you ask me what has happened since you finished writing the book that comes as a surprise, I would say a lot of the things I talk about in my book are happening faster than I would have expected. Things that I thought would happen in the 2015 or 2016 time frame seems to be happening now in some ways.  If anything, the tempo of events is faster than expected. “

“Therefore, some of these catastrophic outcomes may come sooner than I wrote about.”

Rickards told Hunter that “right now, we are on the precipice now”.


“When you are on the precipice, it doesn’t mean you fall off immediately, but you are going to fall off because you can see the forces in play.  What I tell clients and investors is it’s not as if we are going to make some mistakes and some bad things are going to happen.  The mistakes have already been made.  The instability is already in the system.  We’re just waiting for that catalyst that I call the snowflake that starts the avalanche.   You don’t worry about the snowflakes; you worry about the snow and that it’s unstable and it’s just waiting to collapse.  That’s what the system is right now; we are just waiting for a catalyst.  People ask me all the time, what could it be?  Technically, my answer is it doesn’t matter because it will be something.  It could be a failure to deliver physical gold.  It could be an MF Global financial failure.  It could be a natural disaster.  It could be a lot of things.  The thing investors need to understand is the catalyst doesn’t matter.  It’s coming because the instability is already there.”

On gold manipulation and when it will end, Rickards says, “It will end when the physical shortage gets to the point that someone fails to deliver; which, at that point, there will be a buying panic.  There could be a buying panic or what some people call a demand shock.  One of the things I said about gold manipulation is if I was the manipulator, I would be embarrassed at this point.  The manipulation is obvious.  The evidence is coming in from all directions. . . . The manipulation is clear.  When will it end?  It will end when there is a physical shortage that pops up somewhere, or it will end with a short squeeze.”

“We are going to get a very large demand shock coming from China and India”, said Rickards.


“Let me explain those two cases.  We have a brand new government in India, and they are going to repeal the import tax on gold.  We also have the wedding season coming up. . . . So, India is set up for a very large surge in demand in the fourth quarter.  Now, over to China, this is one of the things that it’s happening faster than I originally thought.  The credit collapse story is happening in real time.  I said (in my book) this might be a 2015 event, but it looks like it is happening now.  Defaults are piling up.  We are seeing money rise.  We’re seeing people march down to the banks . . . trying to get their money back. . . . So, if they can’t buy foreign stocks, domestic stocks, don’t want to put their money in the bank and are getting out of real estate, then what’s left?  The answer is gold. . . . I see a demand shock coming from China. . . . You could see a scramble to buy gold.  It is going on anyway, but you could see it accelerate.  That will take down the manipulation.  Once the markets prevail over the manipulators, then watch out.”

Rickards, Washington and Wall Street insider, is certain the collapse will happen. He is just not sure when it will happen.

“It is the thing you won’t see coming that will take the system down.  Things happen much more quickly than what investors expect.”

“What will happen in gold is that it will chug along and then all of a sudden–boom.  It will be up $100 an ounce, and then the next day it will be up another $200 an ounce.  Then everyone will be on TV saying it’s a bubble—boom.  It’s up $300 an ounce, and before you know it, it will be up $1,000 per ounce.”


“Then people will say gee, I better get some gold, and they’ll find out they can’t get it because the big guy will get it.  You know, like central banks and sovereign wealth funds will be able to get the gold.  The typical investor will run down to the coin shop and they will be sold out, and the U.S. Mint will say sorry, we’re not shipping.”  

“You’re going to find out you can’t get it because the whole thing is set up for massive shortages in supply.”

Rickards interview with Greg Hunter is well worth watching and can be seen here





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Someone Is Dead Wrong About The Economy

As we reported earlier, for some today’s economic humiliation of a -1.0% GDP print was merely more good news, and as Goldman announced, weaker than expected Q1 GDP will merely lead to a greater than expected rebound in Q2 GDP.

Here are some other takes:

  • ING: “Overall, this isn’t a terrible outcome”; Sees 2Q GDP at 4.5% annual rate “with inventory rebuilding likely to play its part”
  • Strategas “GDP -1%, old news….mostly noise”
  • Bank of Tokyo’s Chris Rupkey: “2Q growth seen at nearly 4%… Weak 1Q is stone cold dead as an indicator of where the economy is headed.”
  • Newedge: “Prospects for the near future remain relatively optimistic” Sees GDP accelerating to “around 3%” in 2Q as well as second half of year

And of course, the “best” take comes from the White House economic advisor Jason Furman, who said that March, April data “provide a more accurate and timely picture of where the economy is today” and show recovery from recession… A recession which ended 5 years ago mind you. He adds that GDP figures can be volatile; “it is important not to read too much into
any one single report.” Especially if the report shows a 2% contraction when excluding the benefits of Obamacare.

All of these “bullish in the face of adverse data” opinions are what we would dub the equity market’s take: ignoring hard data, and betting on the Fed’s balance sheet and hope for the future (and a blemish-free weather forecast in a priced to perfection and centrally-planned economy of course)

And here is the non-equity market take:

FTN

  • Negative GDP, as reported in 1Q, is “rare for expansions,”
  • “The growth trajectory is flatter than normal, a consequence of an ongoing credit squeeze that has dragged on so long”
  • 1Q inventory decline suggests 2Q GDP rebound of 3.8% annual rate
  • However, “don’t be fooled into thinking -1% was an anomaly and 4% is the new baseline”
  • Drop in 1Q corporate profits dashes hopes for increased capital spending this year

GMP, Adrian Miller: “After 1Q GDP contraction, 2Q data has been very much mixed with the jury out on near-term growth momentum,”

Redfin:

  • GDP shows economy lost ground this winter; so far, little indication will be huge pickup in 2Q home sales to make up for 1Q’s “lethargic” housing mkt, says Nela Richardson, Redfin chief economist.
  • Low inventory, rising prices continue to be “significant headwinds” to housing demand
  • Homebuyer demand in many areas also hurt by affordability pressures, stagnating median incomes that haven’t kept up with inflation

Bottom line: someone is dead wrong on the economy, but we are glad that the weathermen formerly known as economists are putting all these timestamps out there in the public domain. Because we eagerly look forward to seeing just what the scapegoat will be when Q2 GDP mysteriously fails to soar to 4%. And judging by what the bond market is doing, the only place that may see 4% growth in Q2 is China (net of all the fabricated data of course).




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Texas VA Run Like A “Crime Syndicate” Claims Whistleblower

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

“For lack of a better term, you’ve got an organized crime syndicate,” a whistleblower who works in the Texas VA told The Daily Beast. “People up on top are suddenly afraid they may actually be prosecuted and they’re pressuring the little guys down below to cover it all up.”

What’s worse, the documents show the wrongdoing going unpunished for years, even after it was repeatedly reported to local and national VA authorities. That indicates a new troubling angle to the VA scandal: that the much touted investigations may be incapable of finding violations that are hiding in plain sight.  


– From the excellent Daily Beast article published yesterday: Exclusive: Texas VA Run Like a ‘Crime Syndicate,’ Whistleblower Says

Unless you’ve been living under a rock for the past week or so, you are probably well aware of the latest in a consistent stream of scandals that have rocked the Obama Administration since he took office over five years ago. Yes, I am referring to the Veterans Affairs (VA) scandal, and while you might think you have read enough on the topic, the following article is very important.

It tells the tale of a VA hospital in Texas that had institutionalized the practice of manipulating hospital wait lists many years ago. For example, all the way back in 2011, the VA’s inspector general investigated the Central Texas health-care system in response to complaints received. Despite finding that such manipulation was rampant, not a single VA official was disciplined. As you might expect, the practice continued and the hospital highlighted in this article actually received an award in the face of an OIG investigation!

As such, this story has much wider implications than the obvious one. It demonstrates why corruption, fraud and white-collar crime is metastasizing throughout the land. The rich and powerful have recognized the rule of law has been completely suspended when it comes to them. They realize that no matter what they do, the worst thing that will happen is a slap on the wrist. So they continue to eagerly commit crimes at every conceivable opportunity. Of course, it’s the crimes of the rich and powerful that affect the largest number of people, not the impoverished youth slinging a dime bag on some ghetto corner. But which one is getting locked up?

As I have said time and time again, this suspension of the rule of law for the so-called “elites” is the most cancerous thing pervading American society at the moment. Dealing with this will go a long way to solving a lot of other problems.

From The Daily Beast: 

Last week, President Obama pledged to address allegations of corruption and dangerous inefficiencies in the veterans’ health-care system. But before the president could deliver on his pledge, the scandal has spread even further. New whistleblower testimony and internal documents implicate an award-winning VA hospital in Texas in widespread wrongdoing—and what appears to be systemic fraud.

 

Emails and VA memos obtained exclusively by The Daily Beast provide what is among the most comprehensive accounts yet of how high-level VA hospital employees conspired to game the system. It shows not only how they manipulated hospital wait lists but why—to cover up the weeks and months veterans spent waiting for needed medical care. If those lag times had been revealed, it would have threatened the executives’ bonus pay.

 

What’s worse, the documents show the wrongdoing going unpunished for years, even after it was repeatedly reported to local and national VA authorities. That indicates a new troubling angle to the VA scandal: that the much touted investigations may be incapable of finding violations that are hiding in plain sight. 

 

For lack of a better term, you’ve got an organized crime syndicate,” a whistleblower who works in the Texas VA told The Daily Beast. “People up on top are suddenly afraid they may actually be prosecuted and they’re pressuring the little guys down below to cover it all up.”

 

The current VA scandal broke in Phoenix last month, when a former doctor at a VA hospital there became the first whistleblower to gain national attention. The doctor’s allegations of falsified appointments—and veterans dying while they waited for treatment—unleashed a wave of similar claims from VA employees nationwide. In Cheyenne, Wyoming, Chicago, and Albuquerque, more VA whistleblowers came forward claiming that the same fraudulent scheduling was being used in the hospitals where they worked. At last count, the VA inspector general’s investigation had expanded to 26 separate facilities.

 

Though VA hospitals may be struggling with increasing patient loads and inadequate resources—including too few medical providers—they are punished for acknowledging those problems. The VA’s current system appears to reward executives’ accounting tricks that mask deep structural issues and impede real solutions.

Sounds a lot like our entire financial system.

According to Spann, Dr. Gordon Vincent, chief of radiology at Olin E. Teague Veterans Medical Center in Temple, Texas, didn’t just break VA policy by manipulating veterans’ appointments himself. He ordered VA employees across central Texas to engage in the same fraudulent practice.

 

The VA said it investigated Spann’s charges, and, after, finding nothing to substantiate the claims, cleared Vincent and the Texas VA.

We arrest someone every two seconds in America, largely for non-violent drug possession charges, yet the real criminals roam free to feast on society with zero repercussions.

But documents obtained by The Daily Beast appear to show Dr. Vincent doing precisely what Spann accused him of—the activities the VA said it could not substantiate. 

 

By changing the desired date, Dr. Vincent, a VA section chief, was violating well-established scheduling rules detailed in an official VA memo from April 2010 and re-emphasized in a separate policy directive from June of that year. But forging veterans’ desired dates seems to have been widely considered a low-risk, high-reward form of cheating. Changing the dates made it seem as if patients were being seen within the prescribed 14-day window, which reflected well on the hospital and put its staff in line for bonuses.

 

For the veterans seeking care, however, it had no such benefits.

Anyone caught doing this to veterans should be locked up for decades.

The document described above is only one piece of evidence in a larger docket against Vincent, which is itself part of a larger record of corruption in the VA that extends far beyond Vincent or any one individual. In 2011, the VA’s inspector general investigated the Central Texas health-care system in response to complaints it had received. The inspector general found that manipulated appointments were widespread and hid significant delays, but the report doesn’t seem to have led to a single VA official being disciplined or officially held responsible for gaming the system.

 

I saw the press release saying it wasn’t Vincent or any of the executives, that the schedulers were entering the desired dates incorrectly but they were not directed to do so by management. That’s just not true and we’ve got mountains of evidence proving it,” the clinician told The Daily Beast. 

 

“Every doctor, nurse, and clerk in the hospital knows it’s true, but the VA’s investigative team wasn’t able to find any evidence,” the clinician said. “They didn’t interview any of us or really try to find out what was going on. This was reported in 2011 and it’s still not fixed today.”

 

The Central Texas management parroted the inspector general’s findings when the hospital applied for a “Robert W. Carey Performance Excellence Award.” According to the clinician, in the hospitals award application they actually listed as an accomplishment that they had found “front line staff” incorrectly using desired dates in the scheduling process and fixed the problem. It must have been convincing. Despite the OIG investigation, the hospital won the award.

 

What does it say that a VA hospital with this many complaints has not only avoided an accounting—but actually received awards?

It tells you all you need to know about the state of affairs across virtually all institutions and multi-national corporations. As I have said many times before, the primary driver of U.S. GDP at the moment is corruption, fraud and criminality.

Full article here.




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“Pent-Up” Pending Home Sales Demand Missing; Down 9.4% YoY

But it’s the weather… nope… NAR blames excess inventory as giving people too much choice and slowing their purchasing decisions for the notable miss on both MoM and YoY sales. This is the 7th month in a row of declining YoY sales. The 0.4% rise MoM missed expectations of 1.0% as the pent-up demand from a cold winter appears to be missing in action. Of Course NAR is optimistic (but even they are cautious), an uptrend in closed sales is expected, although some months will encounter a modest setback.”

 

7th month in a row of YoY declines…

 

NAR explains…

Lawrence Yun, NAR chief economist, expects a gradual uptrend in home sales. “Higher inventory levels are giving buyers more choices, and a slight decline in mortgage interest rates this spring is raising prospective home buyers’ confidence,” he said. “An uptrend in closed sales is expected, although some months will encounter a modest setback.”

Charts: Bloomberg




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Consumer Comfort Plunges To 6-Month Lows

Despite record highs in stock markets and talking-heads explaining that a terrible Q1 GDP print is nothing to worry about, Bloomberg’s Consumer Comfort index collapsed to its lowest level in 6 months as ‘Buying Climate’ collapsed and economic expectations plunged from 48 to 42.5 (7-month lows). The Fed won’t be happy… need S&P 2,200 for animal spirits to come back again…

 

 

And Buying Climate has plunged…

 

Charts: Bloomberg




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Goldman Boosts Q2 GDP Forecast Due To Weaker Than Expected Q1 GDP

Today is the day when economists weathermen everywhere jump the shark. Here’s Goldman’s Jan Hatzius.

BOTTOM LINE: Q1 GDP was revised lower than expected, mainly due to a larger drag from inventories. Initial jobless claims fell more than expected, while continuing claims declined to a new post-recession low. Because of weaker inventory investment in Q1, we increased our Q2 GDP tracking estimate by two-tenths to 3.9%.

 

Main Points:

 

GDP growth in Q1 was revised to -1.0% (vs. consensus -0.5%), from +0.1% initially reported. Almost all of the net revision was due to a larger drag from inventory investment, which contributed -1 percentage point (pp) to the revision. Inventory investment is now estimated to have reduced GDP growth by 1.6 pp in Q1. Net exports (-0.1pp) and government (-0.1pp) also subtracted, although business fixed investment (+0.1pp) and personal consumption expenditures (+0.1pp) provided partial offsets. Real final sales—GDP excluding inventory investment—was revised down only one-tenth to +0.6%. Real gross domestic income (GDI) for Q1—first reported in today’s report—fell 2.3%, the worst performance since the recession. The core PCE price index rose at a 1.2% annualized rate in Q1, one-tenth lower than initially reported.

 

Because of weaker inventory investment in Q1, we increased our Q2 GDP tracking estimate by two-tenths to 3.9%.

Why are you still reading? You should be BTFATH – after all corporations have billions more in stocks to buyback!




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Excluding Obamacare, US Economy Contracted By 2% In The First Quarter

As if the official news that the US economy is just one quarter away from an official recession (and with just one month left in the second quarter that inventory restocking better be progressing at an epic pace) but don’t worry – supposedly harsh weather somehow managed to wipe out $100 billion in economic growth from the initial forecast for Q1 GDP – here is some even worse news: if one excludes the artificial stimulus to the US economy generated from the Obamacare Q1 taxpayer-subsidized scramble, which resulted in a record surge in Healthcare services spending of $40 billion in the quarter, Q1 GDP would have contracted not by 1% but by 2%!

The history of healthcare spending’s contribution to GDP. The outlier needs no highlighting:

And here is the breakdown of overall Q1 GDP and just the contribution from healthcare. In other words as the “favorable boost” to the economy from this most epic instance of capital misallocation fades, expect the drag to GDP to be even more acute, and will almost certainly offset the benefits of “unharsh weather.”

Source: Dept of Commerce




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S&P 500 Pushes To All Time Highs On First Economic Contraction In Three Years

What do you do when GDP prints twice as bad as expected… buy stawks! And so it is that -1.0% GDP print for Q1 has been greeted with a buying drive in S&P 500 futures to lift it back near all-time record highs this morning. Gold, silver, and the USD are also rising.. and bond yields are rising very modestly.

 

S&P is up…

 

But the Nasdaq is leading…

 

Leaving the S&P 60 points rich to bonds…

 

And here’s why everyone’s bulled up…

 

Charts: Bloomberg




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