Or spread compression when spreads have already compressed.
There is a very flat yield curve globally for different reasons, even in some emerging markets," said Brad Setser, head of global research for the Roubini Global Economics Monitor, a New York-based economics Web site. "I really don't see where the easy money is. No matter how sophisticated you are, you can't get away from the basics of banking: Borrow short, lend long."
Why no easy money? Here is what I see:
A flat yield curve in many advanced economies. There is no money to be made borrowing short and lending to the US government, for example. The globally flat yield curve probably has a thing or two to do with oil – with oil at $65, the big oil exporters could earn something like $830 billion on their oil exports this year (assuming OPEC and Russia produce about 45 mbd of crude and similar product, and consume maybe 10 mbd, leaving 35 mbd in net exports). And a lot of that money is being saved, not spent.
Thin credit spreads. Last year, William Pesek spoke of Kate Moss thin credit spreads. That hasn't changed much. Low spreads mean that the banks cannot make much money by taking on additional credit risk – and are exposed to losses should credit spreads widen (if they mark to market).
A flat yield curve in many emerging economies. There is no money to be made taking in short-term deposits in say Brazilian real and then buying longer-term real denominated bonds. Yes, you can make money if long-term real rates fall. But it not so easy to make that bet when the Brazilian yield curve has inverted, and you lose money waiting for long-term spreads to fall. Brazil's over night rate is 17.25%, one-year Brazilian bonds yield 16.1%.
Where is there money to be made? Well, by taking on a bit of currency risk.