G3 Recap 4-18-11

Main Items:

  • S&P revised US ratings outlook to negative. “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013. If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.” “S&P believes there is a one-in-three chance of a US sovereign downgrade.”
  • Moody’s maintained positive outlook for the US
  • The IMF has said it believes Greece’s debt load is unsustainable and has told the EuroZone and ECB that Athens should consider a restructuring by next year. Greek CDS widened to all time highs today. The sovereign yield curve bear flattened sharply, with the 2yr yield rising by 150bps at it was the richest price point.


  • PBoC hiked reserve requirements 50bps this weekend


  • S&P outlook downgrade actually resulted in higher treasury prices. This suggests that the actual macro impact is likely low, and the main driver was data surprises. I noted on 4/4 that data surprises have been turning negative in the Eurozone, a phenomenon that also applies to the US. The data surprise index (white) vs US 5y Tsy yield (orange) chart reflects this:

    As does the chart of a detrended S&P vs the surprise Index:

    Finally, it is worth noting that valuation, technical and positioning data are all either positive or neutral for the market. As a result, the answer to the question of when to fade this move is fairly straightforward: when the data stops surprising on the downside. In the meantime, another 2.5 months of QE2 and cheap valuations suggest that the odds still favor more upside over the intermediate term.