Yes, it is insane. But Ms. Market's apparent belief is that a U.S. "default event" would have no effect on the chances of payment of the coupons and principal on the 10-Year Treasury bond in the long run, but would exert a powerful depressing effect on the economy in the short run--hence a greater excess supply of savings, a lessened demand for risk, and higher prices for long U.S. Treasury bonds.
Michael Mackenzie and Tim Braithwaite:
US Treasury makes plans for default: US Treasury officials raised the possibility of delaying its benchmark quarterly debt sales in August at a meeting with big Wall Street dealers on Friday held at the Federal Reserve Bank of New York. The Treasury decided against releasing a contingency plan on Friday but – with one eye on Capitol Hill and another on Wall Street – officials could announce as soon as the weekend how they would prioritise payments if the debt ceiling was not raised.
According to a note from Morgan Stanley, the meeting with the 20 primary dealers – who underwrite Treasury debt sales and deal with the markets desk of the New York Fed – focused on the bill auctions next week and a possible delay of the quarterly debt refunding sales, which involves the auction of new three-year, 10-year and 30-year securities.
The news accelerated the fall in Treasury yields in mid-afternoon trading on Friday, with the 10-year note at 2.79 per cent, down 16 basis points – its lowest level since November.