The easy thing to do is call today's Treasury rally a flight to quality. After all, Shanghai was down 9%, U.S. stocks are opening more than 1% lower, subprime mortgage trouble abounds, and corporate and MBS spreads are wider.
But can you really call a 9 tick rally in the 10-year Treasury a flight to quality? As I wrote in a piece about the Thai coup last year, the flight to quality bid just ain't what it used to be. Frankly, the durable goods order figure was enough to justify the Treasury market movement today on its own, forgetting about the other issues.
The troubling thought that is probably holding the Treasury market back today is whether trouble in China will result in fewer dollars flowing to the U.S. I don't think so, because the fundamental imbalances remain in tact. But its a very scary thought.
Spreads right now are pricing in minute amounts of risk throughout the world. I think we're going to need a drastic re-assessment of the icebergs in the water before we have an LTCM-scale flight to quality going on.
ReplyDeleteIt seems to me that everyone is betting that the liquidity sloshing around the system will right any wrongs.
Annual loss rates due to default in high yield bond markets are at about 30bps right now. I think people are more scared about missing the train than losing money.
I might have spoken too soon on the flight 2 quality thing!
ReplyDeleteAnyway, I feel pretty confident that corporate bonds will come back. Nothing about the liquidity situation has changed.