So no one was less surprised than me when Standard & Poors put the debt of the United States government on negative credit watch for the first time in history. If nothing else, this reaffirms the deep lagging nature of the ratings business, which is infamous for closing the barn door after the horses have bolted. They all should have been put out of their misery (and ours!) after the subprime crisis.
What was surprising was the markets’ reaction. I fully expected to get a spanking on my short bond put position, which had recently gone from strength to strength.
The opening saw major selling of stocks, bonds, the Euro, oil, and commodities, and panic buying of gold, silver, and the dollar. Then two hours into the dump, everything abruptly changed course. Treasuries made back their entire two point loss, and stocks rallied steadily, while the (NYSEARCA:TLT) was well up on the day, leaving many traders scratching their heads in puzzlement.
There is only one possible reading of this response. The end of QE2, Ben Bernanke’s massively simulative monetary program, is now fully priced into the market. This was not a great stretch, as the Fed announced the June 30 end date when the ambitious program was made public in November. It means that the coming summer correction in stock markets will bring a quiet bond market at worst, and a robust one at best.
Flight to safety will be the driving force in the markets, and this will be great for government bonds and the dollar. Those awaiting Armageddon will have to wait a few more months. And my bond market puts? My thrashing turned out to be a short, forgiving one, and the position closed out the day at a new high.