Prices of Treasury coupon securities surged dramatically today in a truly historic day of trading. It was a day in which the populist impulse triumphed and the latent suspicion of Wall Street grounded in the middle class heartland rose up to defeat a bill crafted and formed by the ruling elite. (I do not necessarily subscribe to the theory but I think it is what domed the legislation. As I have written in this space before,
$700 billion aint an odd lot!!)
The markets were fragile from the start as credit fears erupted in Europe. The defeat of the rescue package magnified those fears and sent investors scurrying for the safety of the treasury market.
The yield on the 2 year note rotated through a mini interest rate cycle as its yield tumbled 37 basis points to 1.73 percent. The yield on the 5 year note dropped 32 basis points to 2.74 percent. The yield on the benchmark 10 year note fell 23 basis points to 3.62 percent. The yield on the 30 year bond dropped 21 basis points to 4.11 percent.
The 2 year/10 year spread widened 14 basis points to 189 basis points.
The Tips market reflects the collapse in commodity prices and suggests that we are about to usher in an era of deflation. While the yield on the benchmark 10 year note dropped 23 basis points the yield on the 10 year TIP slipped by only 6 basis points, placing that spread at 160 basis points.
I am not sure what to write. We sit on the edge of an historic and potentially destructive financial eruption. This surpasses the fear that I recall in October 1987 when stocks plunged. This is global in nature and chases down its prey ever more rapidly.
The markets have ignored every initiative by authorities to solve the problem and every attempt has failed to halt the deleveraging.I am not sure what sort of plan that the authorities can devise overnight to once more rescue the system. I think that you just stay liquid and pray that you have a seat when the music stops.