Why Treasuries Boomed Today, Even Though It Was "Risk On"


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Today we mentioned an interesting new correlation: Stocks spiking, and Treasuries rallying too.BTIG’s Dan Greenhaus has some theories about market dynamics:

In the face of the news on the debt ceiling – where a $3.75 trillion plan appears to be gaining steam – the Treasury market has been rallying, particularly at the long end where the 30 year yield is lower by over 10 bps.  In our framework, a compromise on the debt ceiling will eventually lead to higher yields.  To the extent nervousness over the ceiling’s extension contributed to safe haven flows, the reversal of that trade should support higher yields.  Along with an improvement in the economy in the second half, this argument has merit in our view.

 At the same time, and we have yet to expand on this in a full note, the complexion of the deficit reduction could complicate the above thesis.  If cuts are frontloaded, they could weigh on an economic growing insufficiently as to withstand the contraction and the bond market may be sniffing this out; with Republican opposition so steadfast, frontloading some of the cuts may have been the only way to get bipartisan support.  Further, if we assume less government spending means less borrowing means less inflationary pressures, this would also support the long tend. Assuming these dynamics weighs on growth, the argument again would support lower yields.

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