August 1, 2011
Among commentators almost everywhere, this July was a month of growing worry about the likelihood of raising the debt ceiling. The Treasury bond market, often a bellwether of investor nervousness, basked in overall confidence, however. The 10-year Treasury Note, for example, actually rallied 40 basis points from July 1st through July 29th, the last trading day of the month, with yields dropping from 3.19% to 2.79%. In the face of a worrying outlook for Congressional action on the debt ceiling and deficit, this was quite a rally – a rather exuberant show of confidence. Six month T-Bills, however, looked ahead at what it viewed as storm clouds and ran the other way, with prices falling, and yields rising from 0.002 to 0.09, still a historic low yield even at 0.09, but a noticeable price decline nonetheless.
This divergence between the long and the short ends of the yield curve signals a reluctance to buy short-term treasuries with a six month horizon while the outcome of debt ceilings and deficits are so uncertain. But the rally in long term securities appears to be a bet that any injury to U.S. creditworthiness resulting from the debt ceiling drama will be relatively short-lived, otherwise we’d have witnessed a July swan dive in the 10-year notes. We saw quite the opposite.
With the government rapidly running out of cash, let’s hope the Treasury market has it right, especially the 10-year neighborhood. They’re supposed to be the “smart money,” after all. Yet, they’ve been misled and misleading before, many times; have we forgotten the pants down mishap of a few years ago? And then, particularly in the unknown waters we still sail upon, as Donald Rumsfeld once lectured us – there are those unknown unknowns . . .
