Monday, June 28, 2010

Treasuries Soar as Investors Flock to Safety

Intersting day today folks.  Investors are spooked.

Let's take a look at the 10 year bond today:

My Take:

This is interesting price action in the bond market given how quiet the market was.  The DOW and the S&P were essentially flat today.

You have to wonder why investors were flying into treasuries on such a quiet day?  The yield on the 10 year hasn't been this low since 2009.

Some serious questions as to why this is occurring need to be asked here:

-  Is the market starting to price in a deflationary depression?  Yields on long bonds in Japan are now under 2% following their deflationary death spiral.  I believe mortgage rates currently sit at 1.6%.

-  Are bond traders positioning themselves for another potential massive QE by the Fed?  Front running the Fed is a popular game that the boys in Chicago like to play.  Perhaps the RBS report on the Fed QE that I spoke about last night triggered some buying.

-  Did someone in Europe blow up?  There were  some unconfirmed reports coming out of Europe that someone or something could have been liquidated.  Gold reversed violently this morning so the possibility that something or someone blew is very real.  When you see large forced liquidations gold tends to suffer because whoever blows up needs to raise cash  The yellow stuff ended down around $17.00.

-  Are investors simply just afraid?  It is becoming more and more evident that there is simply nowhere to hide in this market.  Treasuries appear to be the safest option for investors as the debt crisis in Europe rapidly intensifies. Europeans are flying into treasuries as a result. 

The lack of positive action in the stock market could also be forcing investors over here to re-allocate their portfolios into more fixed income.

My Take Continued

Whatever the reason, bonds appear to be the "sweet spot" for investors right now.

Short term, this action is not surprising given all of the potential land mines the world economy faces. 

Day after day, all investors hear about right now is all of the gloom and doom:  The BP oil spill, state budgetary nightmares, unemployment, foreclosures, fears around the US deficit.  I could name others but I will leave it there.

The "green shoots" mantra that dominated the airwaves in 2009 as the market rallied has now been replaced with talk of an oncoming depression.

Paul Krugman had a piece in The New York Times that discussed what he called "The Third Depression".  I would link you to it but the article was hogwash because he is using the fear of a depression as a way to call for more Keynesian spending which we all know does not work.

Regardless, the gloom and doom is definately beginning to have a psychological effect on investors IMO.  Remember:  The market has alwas been about confidence and psychology.  It's no different this go around.

Right now, people are afraid for this country and our future and they have every right to be in my opinion. 


This has already hit the blogoshpere today so I won't spend to much time on it, but I wanted to comment on the a piece from one of the economists at the Fed who is warning everyone that they should avoid listening to financial bloggers.

Can you say Paranoia?  Perhaps the Fed is worried that the serfs are actually hearing the truth versus listening to the constant "the economy is recovering" propoganda that comes out of the Fed on a daily basis?

Are there some websites out there that are full of Moonbats?  Of course...WOuld you expect anything else from the interenet?

However, It doesn't take a Phd to understand that this isn't working.  All it takes is a little common sense.  When it comes to economists author  P.J. O'Rourke said it best below:

"P.J. O'Rourke, writing in "Eat The Rich" (1998), observed that: "Economics is an entire scientific discipline of not knowing what you're talking about." The only quibble may be with the "scientific" part."
I'll leave it at that.

Let Me End With A Warning

The recent move in bonds is not fundementally sound.  People are flocking to treasuries because they believe this safe haven is the best of the worst.  This is not a sound reason to invest on something but all risk is relative so you hold your breath and buy it. 

For now moving into bonds makes sense.  Longer term I believe it does not.  In fact, moving into bonds could be a colossal mistake if we do not get our fiscal house in order. 

I show this chart a lot because it's very important.  We saw the same type of action in bonds before we fell into a deflationary death spiral back in the early 1930's:

The Bottom Line:

As you can see above, bonds soared after the crash of 1929 as investors flocked to safety.   This turned out to be a big mistake when stocks crashed in 1932.

Bonds collapsed along with stocks as investors lost confidence in the solvency of just about all financial instruments. 

Ater losing confidence, investors began to believe that the safest place for their money was under the mattress.  The only bull market left during these times was cold hard cash!

I think we are seeing a similiar psychology develop right now although I doubt it will come to throwing money under the mattress once again(at least I hope not).

The point here is make sure you spread out your fixed income risk into a variety of assets because treasuries are far from a safe haven with the way the Fed is spending money.

Keep an eye on bonds in the short term because this move into treasuries could be a warning that things are about to really get ugly on the equity side.

 Disclosure:  Owner of PTTRX and BPRAX in longer term accounts.  Small position in TBT in shorter term trading accounts.


getyourselfconnected said...

Indeed, piling into treauries is not the stuff of "recovery". Still the flight to US bonds is amazing. As a reader tipped Barry Ritholtz:
"The US is the best looking the GLUE factory!".

Anytime a trade gets this crowded with this kind of money in soemthing happens.

Jeff said...


Love that analogy.

Thanks for sharing. The market is scared ****less.

I wonder why. Another Lehman type event on the horizon?