Apple Bonds and Unlimited Money

Yesterday, Apple priced a $12B bond offering to the Street.  The demand was extremely strong, and the pricing came in tighter than expectations, with the 30 year Apple bonds just 98 bps over Treasuries.  The 5 year Apple bonds priced just 37.5 bps over Treasuries!  Those are very tight credit spreads for a tech company, where the future is much less predictable than say Johnson & Johnson.  It shows the excess amounts of cash that bond managers want to put to work in this environment.  They are still getting $55B of newly printed dollars every month, and they need to put it somewhere, if they don't want to hold cash collecting zero percent.

This reluctance to hold cash has even forced money into the currently out of favor Treasury market.  Instead of buying any Treasuries, the fund managers are piling into the long end of the curve, making the 10-30 yr part of the curve the flattest I've seen it since ZIRP.  They were scared of duration last year, and this year, they are chasing duration like a heat seeking missile.

For someone who holds a bearish view of the economy, it makes no sense.  With the amount of fiscal tightening and the spent wealth effect (S&P up 30% last year), I see very little catalyst to drive a consensus view of a strengthening economy for the rest of 2014.  It doesn't help that tapering is happening.  But the main thing is tightening fiscal policy.  In 2013, you got rid of the payroll tax cut and Bush tax cuts for the rich, along with adding Obamacare taxes.  Plus, mortgage rates are higher over the past year which is  crimping housing.  A booming stock market in 2013 masked those fiscal tightening effects.  But now the stock market is flattening, and it can't go up 30% a year forever.  Without another big up S&P year, the bare economy will be revealed.  I didn't even bother mentioning the secular demographic headwind where the age 25-54 population is not growing in the US.

Do you think Janet Yellen is going to raise rates with GDP growth at 1%, a stalling stock market, and inflation at 1.3%?  There is no way that is happening.  The Street is jumping the gun again, eager to see normal Fed policy.  If it took them this long after the stock market went from 1420 to 1870 in 16 months to just reduce bond purchases by half, there is no way they will raise rates when the S&P stalls out from the overvaluation and lack of QE.

The flattener is the latest en vogue trade on the fixed income desks, and it is emboldened by the outperformance of the long bond in Q1.  The curve cannot flatten much more.  I expect the belly of the curve, the 5-7 yr bonds to outperform the rest of the curve as the Street reprices the probability of higher rates, to lower odds.

As for stocks, the range trade continues.  The market looks tired, but remember, its still a bull market and stock buybacks and M&A are still pumping along.