Declines in stocks spark demand for safe US govt debt

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bobcat2
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Declines in stocks spark demand for safe US govt debt

Post by bobcat2 » Mon Aug 08, 2011 7:28 am

From Bloomberg.
Treasuries rose as tumbling stock markets sparked demand for the safety of government debt, reversing an initial decline sustained in response to Standard & Poor’s decision to cut the U.S. long-term credit rating.

Two-year yields fell to a record low after Japanese Finance Minister Yoshihiko Noda said U.S. Treasuries were attractive. Group of Seven nations said they will take every action necessary to stabilize financial markets after S&P on Aug. 5 lowered the U.S. rating by one level to AA+. JPMorgan Chase & Co. said any decline in Treasuries resulting from the rating reduction is unlikely to be sustained.

Lack of clarity about the ramifications of the downgrade “is poison to the markets, and therefore we should expect volatility in the form of every risky asset class suffering,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “This will benefit highly rated government bond markets.”

Yields on 10-year notes fell eight basis points, or 0.08 percentage point, to 2.48 percent at 8:05 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 rose 21/32, or $6.56 per $1,000 face amount, to 105 1/2.

The two-year note yields decreased as much as five basis points to the all-time low of 0.2401 percent, breaching the previous 0.2527 percent record reached on Aug. 4.
Link:http://www.bloomberg.com/news/print/201 ... emand.html

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Post by Lbill » Mon Aug 08, 2011 7:31 am

Gold is doing even better - up over $50 above $1700 / oz.
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Post by jack1719 » Mon Aug 08, 2011 7:33 am

Gold in futures today looks like its just ready to zoom...over $1700 an ounce..wow

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Post by bobcat2 » Mon Aug 08, 2011 7:43 am

Yes, but S&P downgraded US Treasuries, not gold.

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Post by TrustNoOne » Mon Aug 08, 2011 7:48 am

This strikes me as "madness of crowds" moment. Stocks fall becuase of the treasury downgrade - so treasuries rise in price......Its as if they forgot why they were selling stocks in the first place.

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Post by rustymutt » Mon Aug 08, 2011 7:56 am

TrustNoOne wrote:This strikes me as "madness of crowds" moment. Stocks fall becuase of the treasury downgrade - so treasuries rise in price......Its as if they forgot why they were selling stocks in the first place.
It's poor decision making by very nervous investors. Like a herd of sheep when a lion approaches.
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Post by Lorraine » Mon Aug 08, 2011 7:59 am

I don't believe stocks are falling because of the downgrade - it's because of all the economic problems in Europe and US. Money is being moved from the risky stocks to safety, i.e. treasuries and gold. Just my guess. I have no concerns about the s&p downgrade but I certainly have major concerns about Europe and US economies.

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Post by bobcat2 » Mon Aug 08, 2011 8:01 am

It appears that at least initially Mr. Market is rejecting S&Ps assessment of the relative safety of US Treasuries.

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Post by richard » Mon Aug 08, 2011 8:09 am

bobcat2 wrote:It appears that at least initially Mr. Market is rejecting S&Ps assessment of the relative safety of US Treasuries.
Once you get beyond "initially," movements in treasuries will be based on something other than S&P's assessment. It's not as if the news hasn't already been disseminated and considered.

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Post by Valuethinker » Mon Aug 08, 2011 8:10 am

richard wrote:
bobcat2 wrote:It appears that at least initially Mr. Market is rejecting S&Ps assessment of the relative safety of US Treasuries.
Once you get beyond "initially," movements in treasuries will be based on something other than S&P's assessment. It's not as if the news hasn't already been disseminated and considered.
It's all flight to safety. US Treasuries and MBS are c. 40% of all the triple A rated securities in the world (and 2 rating agencies still rate them triple A).

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Post by richard » Mon Aug 08, 2011 8:10 am

Lorraine wrote:I don't believe stocks are falling because of the downgrade - it's because of all the economic problems in Europe and US. Money is being moved from the risky stocks to safety, i.e. treasuries and gold. Just my guess. I have no concerns about the s&p downgrade but I certainly have major concerns about Europe and US economies.
Exactly

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Post by grayfox » Mon Aug 08, 2011 8:13 am

IMO, the S&P downgrade has zero impact on stocks, Treasuries, gold or anything.

I guarantee you that U.S. Treasuries will not default in our lifetime.

That said, the U.S. economy stinks, Europe is in trouble and the price setters are moving out of risky assets.
Last edited by grayfox on Mon Aug 08, 2011 8:16 am, edited 1 time in total.

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Post by richard » Mon Aug 08, 2011 8:15 am

Valuethinker wrote:It's all flight to safety. US Treasuries and MBS are c. 40% of all the triple A rated securities in the world (and 2 rating agencies still rate them triple A).
An often overlooked reason that treasuries are safe is that there are so many of them. It's an incredibly liquid market. No other series of securities comes anywhere close. Throw in the ability to repay in its own currency and the absence of any threat of inflation, and you have a great place to fly to if you want safety.

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Post by Lbill » Mon Aug 08, 2011 8:16 am

Don't forget that the markets seem to be pricing in a likely recession, which seems even more likely now with the debt downgrade and the events in Europe. I see no reason that interest rates can't decline because of that. Bonds in general should rally in price - not just Treasuries.
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Post by bobcat2 » Mon Aug 08, 2011 8:22 am

Hi Richard,

I agree. There were those who thought the downgrade would result in higher treasury yields, and there were others such as you and me that thought this would have little effect, because the market for US government debt is large and transparent and doesn't need guidance to price the securities. Nothing that has happened so far supports the former view.

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Post by sscritic » Mon Aug 08, 2011 8:26 am

I thought from the thread title that there were demands for a new kind of senior US debt that would be safe, a debt with a greater priority in case of default on ordinary treasuries. You know, safe US debt.

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Post by Lbill » Mon Aug 08, 2011 8:43 am

Can you hear the howls of glee from those who hold the Perfect Portfolio? Half in Treasurys, and a quarter in gold. Who gives a hoot about stocks?
"Life can only be understood backward; but it must be lived forward." ~ Søren Kierkegaard | | "You can't connect the dots looking forward; but only by looking backwards." ~ Steve Jobs

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Post by yobria » Mon Aug 08, 2011 8:50 am

rustymutt wrote:
TrustNoOne wrote:This strikes me as "madness of crowds" moment. Stocks fall becuase of the treasury downgrade - so treasuries rise in price......Its as if they forgot why they were selling stocks in the first place.
It's poor decision making by very nervous investors. Like a herd of sheep when a lion approaches.
Stocks are falling today because of millions of private investor decisions due to 1000s of factors, most of which you're not aware of.

Assigning the drop to a certain event you may have read about in the news is poor decision making IMO.

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Post by grayfox » Mon Aug 08, 2011 8:51 am

Lbill wrote:Can you hear the howls of glee from those who hold the Perfect Portfolio? Half in Treasurys, and a quarter in gold. Who gives a hoot about stocks?
I had some in PP at one time. Bought in when gold was 900. Unfortunately sold when gold hit about 1100.

However, I have a http://www.smartmoney.com/portfolio/ that tracks a world PP in real time, second by second. The stability of it is uncanny. :shock:

Right this second

GLD +933
SHY +11.58
TLT +271
VT -927

Total +247, 255, 263, 265, 271, 265, 271 ...

It's fun to watch in real time.

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Post by richard » Mon Aug 08, 2011 8:56 am

sscritic wrote:I thought from the thread title that there were demands for a new kind of senior US debt that would be safe, a debt with a greater priority in case of default on ordinary treasuries. You know, safe US debt.
US treasuries are as safe a financial asset as there is.

Treasuries are senior debt. You can't layer a more senior layer on top (any suggestion the US should issue secured debt will be ridiculed).

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Post by etarini » Mon Aug 08, 2011 9:07 am

richard wrote:Treasuries are senior debt. You can't layer a more senior layer on top (any suggestion the US should issue secured debt will be ridiculed).
They could always do what some municipal bond issuers do - pre-fund them with U.S. Treasuries...oh, wait...

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Post by fredflinstone » Mon Aug 08, 2011 9:09 am

The bond market rejects S&P's assessment. It is not at all worried about treasury default risk.

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Post by Indices » Mon Aug 08, 2011 9:13 am

The Permanent Portfolio leans back, kicks off shoes and lights a cigar.

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Post by SVariance1 » Mon Aug 08, 2011 9:15 am

This is not surprising to me. As Valuethinker said, it is a flight to safety. Treasuries have historically performed very well during times of crisis. This time is apparently no different so far.
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Post by jack1719 » Mon Aug 08, 2011 9:20 am

I think gold has leaped frogged treasuries as the #1 flight to safety vehicle...treasuries are still of course way up there,but the shine has tarnished quite a bit off them..

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Post by fredflinstone » Mon Aug 08, 2011 9:22 am

I have 5% of my liquid assets in gold and silver. On days like today, I am glad.

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Post by allsop » Mon Aug 08, 2011 9:35 am

fredflinstone wrote:The bond market rejects S&P's assessment. It is not at all worried about treasury default risk.
Nor are we experiencing high inflation that so many predicted.

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Post by sscritic » Mon Aug 08, 2011 10:01 am

richard wrote:
sscritic wrote:I thought from the thread title that there were demands for a new kind of senior US debt that would be safe, a debt with a greater priority in case of default on ordinary treasuries. You know, safe US debt.
US treasuries are as safe a financial asset as there is.
Here's what I know

There was a debt limit debate.
The Treasury was making plans for what debts would be paid first.
S&P downgraded US debt.
AAA and AA+ are not pronounced the same.

According to wikipedia, a listing of the top 10 safest sovereign debts did not include the US in September, 2010.

Code: Select all

Rank Country Overall score 
1     Norway       93.33 
2     Switzerland  90.22 
3     Sweden       88.93 
4     Denmark      88.80 
5     Finland      88.55 
6     Luxembourg   88.27 
7     Canada       88.26 
8     Netherlands  88.20 
9     Hong Kong    87.18 
10    Australia    86.18 

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Post by MWCA » Mon Aug 08, 2011 10:14 am

grayfox wrote:IMO, the S&P downgrade has zero impact on stocks, Treasuries, gold or anything.

I guarantee you that U.S. Treasuries will not default in our lifetime.

That said, the U.S. economy stinks, Europe is in trouble and the price setters are moving out of risky assets.
Sounds about right to me. Depends on your lifetime ;)
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Post by TrustNoOne » Mon Aug 08, 2011 10:19 am

yobria wrote:
rustymutt wrote:
TrustNoOne wrote:This strikes me as "madness of crowds" moment. Stocks fall becuase of the treasury downgrade - so treasuries rise in price......Its as if they forgot why they were selling stocks in the first place.
It's poor decision making by very nervous investors. Like a herd of sheep when a lion approaches.
Stocks are falling today because of millions of private investor decisions due to 1000s of factors, most of which you're not aware of.

Assigning the drop to a certain event you may have read about in the news is poor decision making IMO.

Nick
Ok then - its a popular delusion moment. :lol:

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Post by allsop » Mon Aug 08, 2011 10:33 am

sscritic wrote:
richard wrote:
sscritic wrote:I thought from the thread title that there were demands for a new kind of senior US debt that would be safe, a debt with a greater priority in case of default on ordinary treasuries. You know, safe US debt.
US treasuries are as safe a financial asset as there is.
Here's what I know

There was a debt limit debate.
The Treasury was making plans for what debts would be paid first.
S&P downgraded US debt.
AAA and AA+ are not pronounced the same.

According to wikipedia, a listing of the top 10 safest sovereign debts did not include the US in September, 2010.

Code: Select all

Rank Country Overall score 
1     Norway       93.33 
2     Switzerland  90.22 
3     Sweden       88.93 
4     Denmark      88.80 
5     Finland      88.55 
6     Luxembourg   88.27 
7     Canada       88.26 
8     Netherlands  88.20 
9     Hong Kong    87.18 
10    Australia    86.18 
The top five include four Nordic countries (with only Iceland absent) that have high revenue, but they are also in the very top in stock performance the latest eighty years (see Triumph of the Optimists). I leave it as an exercise as to what the Tea Partiers think about that.

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Treasury debt

Post by Don Levit » Mon Aug 08, 2011 12:49 pm

Richard wrote:
Treasuries are senior debt. You can't layer a more senior layer on top.
Well, maybe yes, and maybe no.
The GAO has 2 papers on the various levels of commitment to pay off debt the federal government recognizes.
Future Social Security and Medicare benefits are not even considered liabilities.
'They are the lowest level of debt obligation, level 4.
Debt held by the public is considered level 1, the strongest obligation to fulfill.
See "Federal Debt, Answers to Frequently Asked Questions, An Update:"
Pages 65 and 66.
http://www.gao.gov/new.items/d04485sp.pdf.
Also see "Fiscal Exposures Improving the Budgetary Focus on Long-Term Costs and Uncertainties:"
Pages 3, 12, 15, and 25.
http://www.gao.gov/new.items/d03213.pdf.
Don Levit

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Post by Tadpole » Mon Aug 08, 2011 1:57 pm

As one surfs the net today, everything makes sense.

There is the "buy while blood is in the street" crowd.

There is the "flight to safety crowd".

There are a lot of amiable encounters taking place.

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