Something's Gotta Give

Someone shared this interesting chart with me the other day.

The chart shows that the spread between 1 year and 10 year GSEC has remained, consistently, above 200 bps for the last 2 months (as of today its 225bps). Previously, this spread has generally been around 100 bps. This trend, obviously, is accentuated by RBI actions since they have concentrated on the shorter end of the curve, but eventually Something’s Gotta Give.

My money is on long term yield coming down as well coupled with the spreads contracting.

On equities front, markets are stubborn and holding to higher levels. US stocks have had the best quarter since 1998 with S&P rallying nearly 20%, Nasdaq 31% and Dow is up by 18%. Contrary to the upward move in the markets, Gold is at $1800 up close to 30% in the last one year (8% in the last 2 months) and I thought they were inversely related. So this really is a tough one, and I really wouldnt t like to stick my neck out on this one. Gun to my head, I would have to say equities as I don’t see demand. In an era, where companies themselves don’t know how things would pan out, I don’t think we, in the equity markets, are smarter than the guys running the business. Market is happy that companies are starting production and people are going back to work, but you may ask yourself a few questions as a consumer:

1.      Are you going to buy a car?

2.      Will you be going for a movie anytime soon?

3.      Will you be travelling – Sorry I am just kidding with this one.

Demand was already weak going into the lockdown, this has just accentuated the problem and hence I think what I would be tracking is how demand pans out.