Monday, June 14, 2010

Investors Flee into Treasuries as Global Debt Concerns Intensify

What an interesting day today.

Let's start with the short term bond market auctions today. The 3 and 6 month treasury sales recieved record bids as investors continue their flight to safety.

Yields have collapsed as a result. Translation here folks: Wall St. is scared to death!

Here is the info from the AP:

"Rates on Treasuries hit lowest level since JanuaryWASHINGTON (AP) -- Interest rates on short-term Treasury billsfell in Monday's auction to the lowest levels since late January.

The Treasury Department auctioned $27 billion in three-monthbills at a discount rate of 0.065 percent, down from 0.130 percentlast week. Another $27 billion in six-month bills was auctioned ata discount rate of 0.150 percent, down from 0.210 percent lastweek.

The three-month rate was the lowest since these bills averaged0.055 percent on Jan. 25. The six-month rate was the lowest sincethey averaged 0.135 percent, also on Jan. 25."

Take a look at what the IRX(13 week treasury bill has done over the past few weeks:

My Take:

The risk trade is now off. Investors would rather sit in treasuries at zero yield right now instead of sitting is risky assets like stocks as fears of debt contagion continue to worsen.

Greece's debt took a beatdown from Moody's today:

By Bill Koenig

June 14 (Bloomberg) -- Moody’s Investors Service said itdowngraded Greece’s government bond ratings by four levels toBa1 from A3. The outlook is stable, Moody’s said."

Ouch! That's gonna leave a mark! A four notch drop to Ba1 essentially means that Greece's debt are now "junk bonds".

So much for the Greece bailout! It will be interesting to see what the EU does in response to this rapidly detiorating situation.

I think reality is slowly beginning to set in that both the political will and the money is simply not there to bail out all of the PIIGS. It's an all or none scenario. You can't just bail out Greece and let the others die.

Since this is the case, I am sure the EU is thinking: Why should we bail out Greece then if we can't "save" them all?

Personally I think Greece is toast. When you start getting "junk" ratings on your bonds the game is over.

This is why the short end of the bond market here in the US is now collapsing.

The rally this morning failed miserably when the Greece news hit the wires. This was a critical failed rally because we bounced up right below the 200 day moving average on the S&P for a 3rd time and failed.

This is extremely bearish in my view.

The Bottom Line

The fact that the market couldn't rally on a day where the Euro rose sharply is a big concern for the markets. In recent weeks we have seen the markets rise when the US dollar sold off. This has investors puzzled.

Last week the economic data in the US was flat out awful: We saw weak monthly consumer data, a 44% rise in foreclosures in May, and a continued collapse in mortgage applications.

This weakness is now starting to weigh on the dollar as the economy shows signs that it might be contracting versus showing signs of recovery and continued growth.

Investors are now scared and confused and don't know where to put money to work as both Europe and the USA appear to be on the edge of falling off a cliff economically.

Since the Asian economies are so dependant on the developed world's consumers, investors really don't want to buy equities over there either.

As a result, the money is flowing into short term treasuries as investors run for cover as they prepare to ride out the economic "Storm of the Century".

Let's see if the bulls try and make another charge at 200 day moving average of 1107. If we fail and head south S&P 900 will be right around the corner.

Disclosure: Now new positions at the time of publication.