The typical thinking on Treasuries is that the whole debt ceiling/default talk is a negative.
But Treasuries are on a tear lately… does that mean the market thinks the debt ceiling isn’t an issue? That seems hard to believe, given the tough talk from John Boehner last night.
Something to consider: A failure to raise the debt ceiling might actually be a major positive for Treasuries since a) the related spending cuts would slow the economy and b) the limitations on debt issuance would make risk-free US credit even more scarce.
Thus the vicious rally we’ve seen over the last month (below is chart of 10-Year Treasury Futures) could be taken as a sign that the market expects no hike for a while, and a major curtailment in supply.