Today’s equity market selloff and concurrent treasury rally were dramatic and unexpected by many. The strain on the system was so dramatic today that the 1 month Treasury Bill, often used as a cash substitute actually sustained a negative yield for a moment, and was captured here in the Bloomberg screen below next to the “4W” in the US T-BILL YIELD/PRICE box. Surprisingly, among all of the FX surprises, the Canadian dollar is once again worth less than the US dollar.
It’s worthwhile to note that despite the presumed stress in the markets, and despite the odd print in the TED spread in the days before the debt ceiling vote when short term treasuries actually sold off dramatically, today the TED spread barely budged. As a common indicator of risk in the banking system, this is a good print, at least for the moment, and a sobering data point to suggest that we are not headed into a repeat of 2008, at least at this point.
Looking at credit default swap prices for major banks, its interesting to note that while systemic risk has risen steadily since the 2011 Euro debt crisis reemerged, the too big to succeed/too big to fail banks don’t seem to be bifurcating like they did in 2008 when Bear Sterns and Lehman Brothers were singled out.
Lastly, despite all the attention on a US default and downgrade, today the United States was ranked the third safest countryas measured by 5 year credit default swap prices. This is the highest rank I’ve seen the US in in a long time.
I read late in the day that there were some technical issues in the treasury market, and these may persist for a time as the Fed essentially wound down some of the liquidity it had been providing in order to avoid going into default if Capitol Hill had not gotten the debt ceiling raised. This apparently may have led to a massive shortage in t-bills, and also spilled over into demand for other short term treasuries including 2 year bonds which hit an all time record low yield.
It’s hard to tell what is going on now. Just a week ago short term treasuries were selling off precipitously on fear that the US would default. Today the exact and extreme opposite happened as more fears were raised that the European debt crisis is spreading, and that leadership in Europe is divided on the proper solutions. Sometimes separating the noise from the fact helps make sense. Sometimes the noise creates emotions that lead to new facts. The proverbial tail wagging the dog.
It certainly remains to be seen what policy responses come out of this, how long such decisions take and how markets react from here. One thing is for certain, the more obvious the trade or direction is the largest group of people, the more likely the exact opposite trade will be the best way to make money.