Portugal, and yields, and Iran - oh my! None of these are new stories.
Portugal is bigger than Greece - but we knew that. Moreover, we knew Portugal was in dire straits. We knew Germany was already hesitant to provide more assistance and would demand higher guarantees.
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In a nutshell, this article summarizes the problems we are facing.
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I am bearish on treasuries long term, but in the short to medium term, I'm not sure investors will have many alternatives, especially as the euro denominated debt continues to pose currency, liquidity, and solvency risks. Then there is the issue of implementation.
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I assume Berlusconi is having some sleeping problems this week as his government falls; his only consolation is that prognosticators who predicted Italian bond yields would fall when he's gone have turned out to be completely mistaken. The problem with Italy isn't Berlusconi . . . it's Italy.
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Here in the US and internationally, spreads are telling a story that's worth listening to.
That's 30/10, meaning 30 year yields are rising faster (bond prices falling) than the 10 year yields.
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From
Wikipedia:
A Minsky moment is when over-indebted investors are forced to sell good assets to pay back their loans, causing sharp declines in financial markets and jumps in demand for cash.[1][2] In any credit cycle or business cycle it is the point investors begin having cash flow problems due to the spiraling debt incurred in financing speculative investments.
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There is a flood of data and headlines that seems almost spiteful to anyone trying to enjoy their usually-slow August. For me, it gives a good excuse to turn away and read even slower as most of the flood is meaningless for my portfolio. That being said, some of it is not.
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The US was downgraded and bonds went up...relative risk. In a world where equity markets are swinging 2-3% even before the open, bonds, even of a lower rated sovereign start to look mighty interesting - until they don't. For now, there's an economic name for it: deflation.
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S&P downgrade US treasuries, as expected...actually, I thought Moody's would downgrade as well, if only to make a statement about their power and impartiality and regain some lost trust.
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On Friday, into the close of the market, with no debt deal in site, treasury yields fell as prices rose with seemingly superhuman strength.
You might be wondering, "Why on earth would prices rise as default risk increases and the US's credit rating is threatened?" Good question - I'm sure a lot of people who were shorting the 10 year into the weekend were thinking the same thing.
Here's the analysis from
Brad DeLong:
Yes, it is insane.
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One might think that a looming debt downgrade would cause a sell-off in treasuries...One would be wrong. the 10 year is not at the highest level ever, but let's put rates in perspective.
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Three words: money market funds. Euro breaking apart. Banks at risk. Liquidity at a premium. Downgrades of global sovereigns. Equity pullback. Sure, all of these are important and I don’t want to discount them. In the end, though, they will all “speak” through the money market funds.
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Remember when the curve was getting steeper each day? Remember when we started warning that the steepness was going to catch a lot of net interest margin (NIM) players flat footed when it finally turned? Well, it might be turning.
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I have to admit that the title is not mine, although oh I wish it were. Peter Hooper at Deutsche Bank just came out with a report (h.t.
ZeroHedge.com) sporting this title.
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Turns out that lowering the outlook from stable to negative IS still legal, and surpringly S&P actually did it. I thought it would never happen, but lo and behold, they did it. Here's from their statement:
The negative outlook on our rating on the U.S.
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Currency, Fixed Income/Bonds, Strategy/Allocation | | 
January 30, 2012 1:45 pm | 
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