Tuesday, September 19, 2006

Attention passengers: All U.S. Treasury flights to quality have been canceled

In 2002, news of a coup in Thailand would have put a serious bid into the Treasury market. Traders would have called it a "flight to quality," or a situation where investors are selling risky assets and buying safe assets, like U.S. Treasuries, causing the U.S. bond market to rally.

Today, as tanks surround the Thai Prime Minister's office, the Treasury market had no reaction. Sure, the 10-year is up 1/2 point, but it had already made that move by about 9:45 on the weak PPI and housing starts figures. The Thai Baht didn't start moving until 11AM, which is when the Thai Prime Minister Thaksin Shinawatra declared a state of emergency from New York.

So why no move? I think there are a few possibilities I'll throw out there for discussion.

1) The market anticipated political turmoil in Thailand, so this isn't really news. Doesn't seem like it. The Baht had been strengthening for most of the last 6 weeks, then a sudden sell-off today.

2) Thailand isn't that important. Not buying that. Granted, its not a geo-political event on the scale of 9/11, or were there to be a coup in Russia or Iran, but Thailand is a major economy among the emerging markets. EM has been a hot investment prone to dumping. Plus the U.S. stock market has moved markedly lower after the news in Thailand.

3) U.S. Treasuries aren't the only "flight to quality" asset. Could be. Maybe money is flowing into Gilts and Bunds too. Based on the futures markets, the Gilt market is up today, but not much since 11AM. The Bund market has rallied mildly post 11AM. It might be that with the "flight" assets spread around 4-5 markets around the world, that it is having a mild impact on any given market.

To me this is the most plausible explanation, and it may hint at things to come. If Asian investors fearing local turmoil are spreading their assets in Europe and the U.S. instead of just the U.S., does this mean that foreigners are going to be less of a force in the U.S. market? Was that foreign purchases figure we saw the other day just the beginning?

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