Daily Clueless Musings 4/18

Today is pretty crazy. The well known secret in Europe is Greek debt is unsustainable and some form of default is inevitable. WSJ reported IMF Believes Greece Should Consider Debt Restructuring By 2012 this weekend. Greek officials continued to deny that restructuring was an option. It is like hiding fire in the pants. We all know whose pants will be on fire. Greek officials must wish they had the money printing press that US has. US Treasuries traded higher, after S&P change the outlook on US debt to negative, which implies 1/3 of probability of downgrading in 2 years. Rating agency has repeatedly lagged market in pricing credit risk. It seems to be the case again. Real yields has been on the rise since Obama extended Bush tax cuts. Market seems to perceive today's downgrading might push government to cut back on fiscal stimulus and take more austerity measures this year, instead of kicking the can down the road. Just like UK did their austerity measure last year, this is likely to slow down the current recovery. Fed might be forced to be more accommodative to compensate the cut back of fiscal stimulus. Or like UK, Fed is going to be squeezed by higher inflation and slow growth. And therefore dollar was strong today, as people unwind their carry trade position in risky assets. Yield curve is flatter in the front, as market is pricing a slower recovery without fiscal simulus.