Page 2 - The GSE Report March-April 2018

THE GSE REPORT MJAARN.U-ARPYR.22001188
While markets have been rattled by a range of risks including trade frictions flaring up, tech sector concerns, rising commodity prices and inflation, or a slew of geopolitical flashpoints— the most likely scenario remains that of a building economic recovery, especially in the U.S. Accordingly, one must expect yields to rise further, particularly in the face of a bloated U.S. government supply and a gradual ending of ECB QE stimulus.
We therefore have the context of a firm global economy but face higher yields, more volatility and reduced technical support for fixed income in general. Oil prices have crawled higher and higher. A wide range of commodity price increases, crazy home prices, and the context of little slack in labor markets have fueled inflation concerns and helped push up government bond yields—the yield on 10-year U.S. Treasuries hit its highest level in years, crossing the 3.00% threshold. That move also drove the gap—or spread—with German bonds to the widest in about three decades.
Of course, higher oil prices will make U.S. oil even more popular. U.S. oil has already gained in popularity in part because of the wide gap between West Texas Intermediate, the U.S. benchmark, and Brent. The benchmark Brent is more expensive and sets the price for most of the world’s crude grades. This gap, known as the Brent/WTI spread, has averaged around $4.50 per barrel this year, nearly twice as high as year-earlier calculations. Russia paired with OPEC have been successful in elevating benchmark Brent prices to four-year highs. Of course, the horrible circumstances in Venezuela have also shut down oil production. Newly elevated prices and lots of U.S. production have made it harder to sell Russian, Nigerian and other oil grades in Europe, and U.S. oil is therefore everywhere... What a turn of events!
Abraham Gulkowitz
The Punchline
April 27, 2018
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