Strange Times for Financial Markets

by robekulick

The recent behavior of Treasury Notes has been so interesting I just had to write a quick entry, even though I don’t really want to blog more about the debt ceiling crisis until we actually know something more.

Yields (interest rates) on Treasury Notes have actually fallen today despite the hysteria in the media (literally it was the only thing I saw being discussed on the news last night). As my previous posts have implied, I think that probability of anything catastrophic happening is pretty low, but I would at least expect bond traders to be a little spooked and for yields to be increasing at least a little bit at this point.

Of course, ignoring the issue of the default ceiling here, there is very good reason for US bond rates to be falling.  The intrade odds of Greece going into true default are approximately 70% and increasing yields on Italian and Spanish government debt portend a rocky road for sovereign debt in Europe. And then there’s the widespread evidence of inflation in the major Asian emerging markets like China, India, and Vietnam. In such situations, it generally happens that investors flock into the least risky assets available.