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The US Corporate Bond Market has Ballooned by $3.7 Trillion During the Past Decade.

US and European stock rallied amid optimism Greece will reach a deal with creditors, an advance led by energy, financials and technologies.  Oil rallied as inventories fell by an amount greater than expected, the sixth weekly decline and the longest series of declines since August.

Treasuries again traded lower as Germany’s 10 year bund yield topped 1% for the first time since September.  Two months ago the 10 year German Bund was yielding 0.08%.Treasury yields are now around 8 month highs.

An emerging theme of these remarks is the narrowness and the illiquidity of the markets, an environment that is perhaps more pronounced in the bond market.

Citicorp wrote yesterday the US corporate bond market has ballooned by $3.7 trillion during the past decade with almost all the growth concentrated in three types of buyers; insurance companies, foreign investors and mutual funds.  Citi remarks 10 years ago there were 23 types of investors.

The concern is what happens if selling commences given that the groups mentioned above hold almost two thirds of all debt outstanding?  Citi states mutual fund holdings have doubled in the last 10 years to 22% of the corporate bond market. Foreign investors now control 25%.

Conversely and more importantly, dealer inventories have plunged by more than 76% in the past year, the result of tougher banking regulations.

To write it simplistically, there is no backstop, a view I first expressed last fall during the decimation of energy bonds.

Fortunately the environment is being discussed amongst the largest money centered banks and regulatory authorities, discussions that can potentially avoid an ugly liquidity crisis.

What will happen today?  Has the increase in crude negatively impact retail sales?  What about import prices?

Last night the foreign markets were up.  London was up 0.48%, Paris up 1.15% and Frankfurt up 1.32%.  Japan was up 1.68% and Hang Sang up 0.83%.

The Dow should open flat as retail sales met expectations and jobless claims were around expected levels. There appears to be some headway on the Greek debt issue. The 10-year is up 13/32 to yield 2.44%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.