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Few things have been more confusing to traders in the last few weeks than the action in the bond market. With the USA on the verge of a near default and QE2 now over, there are few investors who would have thought that bonds would be an outperforming asset class. Even bond market “gurus” said: “Who will buy Treasuries when the Fed doesn’t?”

I’ve pointed out most of these misconceptions about U.S. government debt in real-time and why QE2 was never a “funding” source for government spending, debt monetization, etc. The debt ceiling debate is no exception. It’s been another charade with all the usual players spreading fallacies about the American monetary system. (If you’ve noticed a bit of frustration in my writing lately it is due to the disgust resulting from the way this entire thing has been handled by our politicians AND the media. Don’t worry, I’ll get over it!).

The bond market was never worried about U.S. default or the end of QE2 because that’s not what the bond market takes its cues from. The bond market takes its cues from the Fed. And the Fed takes its cues from the economy. The simple message coming from the debt ceiling debacle has not been one of insolvency. Only the media and the fearmongerers were focused on an actual insolvency. The real story here was always the impact of the debt ceiling outcome on the real economy. And the bond market’s message has been loud and clear. Bond traders think this deal stinks for the economy and what they see is an anemic economy. It’s that simple.

Click to enlarge:

Source: What Is the Bond Market Saying?