Another Flight to Treasuries: Avoiding a Summer Storm?

Just a few quick thoughts, so move on along if you find this irrelevant.

The auction of 10-year bonds Thursday was by all accounts a home run. Investors gobbled up the issue, led by central banks and the yield on the bond dropped precipitously. Remember, several weeks ago it was at 4% and the talk was of a rout in Treasuries. So what’s going on?

Put the auction together with what might not be accurately called a collapse but certainly a major decline in oil and other commodity prices, including gold as well as a weak market for equities and you have the makings of a consensus that neither this economy nor the global economy is looking at near term recovery. That infamous return of animal spirits seems to have been for the time being neutered.

I think that the jobs numbers last week scared the bejesus out of everyone. It might be just a bad data set but the fact that every subset of the data was so bad makes it hard to toss off. I’ll be the first to say that it surprised me and certainly changed my previously rosie outlook for the second half.

Don’t discount politics either. The Obama administration stumbled badly this week with conflicting messages on a second or third stimulus program — depending upon how you’re keeping score. Layer that on more than a little nervousness about the spending and tax increases inherent in health care and climate control legislation and you get a jittery market. Somehow it seems like they're dancing on the decks of the Titanic while the water pours into the hold.

Note to Rahm: A crisis can turn from a great opportunity to a quagmire in the blink of an eye (Refer to LBJ administration).

There’s a strange feeling about right now. Like a summer evening that’s hot, humid and oppressive with lightning crackling in the distance. This economy might have some surprises yet in store for us. Investors are certainly behaving like they see it coming.

Comments

[Dave Wrixon:]

So a flight from the disappointment of a delusional recovery into a haven of delusional safety. The education gap in the US is truly astonishing!

Jul 09 01:14 PM

[Tom Lindmark:]

Well said.


On Jul 09 01:14 PM Dave Wrixon wrote:

> So a flight from the disappointment of a delusional recovery into
> a haven of delusional safety. The education gap in the US is truly
> astonishing!

Jul 09 01:23 PM

[Mad Hedge F...:]

Definitely. The incredible melt up in Treasuries yesterday tells you that traders are dumping the global reflation trade like a hot potato. The ten year yield spiked up to a high of 3.28%, down from 4% only a month ago. Yesterday’s auction of ten year Treasury notes saw an amazing bid to cover ratio of 3.28, the highest in 15 years. When traders don’t want to play, they flee to government paper. The music has stopped playing, so it’s time to sit down. It looks like the deflationistas are going to have the upper hand over the inflationistas for the next couple of months. See my interview with Janet Yellen at (www.madhedgefundtrader...). This certainly puts my TBT trade on hold (see “Sell in May and Go Away” at www.madhedgefundtrader... and “The Viagra is Wearing Off” at www.madhedgefundtrader...). It’s best to read the writing on the wall, especially when it is in ten foot high, in fluorescent block letters, like this.

Jul 09 03:44 PM