Friday, July 15, 2011

Default Doubt

For all the talk this week of a potential US sovereign debt default, the market seem to be convinced otherwise. All the King’s politicians were out pronouncing a default to be ‘cataclysmic’ or ‘unthinkable’. Yes, the US Congress has been consumed with the debt ceiling in the US. It seems $14.3 trillion is not enough to borrow. The politicians want more. Citizens are once again threatened with the idea of not taking on more debt as a bad thing. Really? I thought it was good to minimize debt and pay it off if possible. Anyway, the equity markets dipped a bit this week but the most interesting thing was the behavior of the bond market.
Staring a default threat in the face, the bond market rallied. That’s right, the US Treasury bond market rallied. The chart below is the US 10-year Treasury note and we can see from the chart that it rallied about 2% this week. The message is there is great doubt about a default. It is just not going to happen. See the chart below.

3 months: UST
Chart courtesy

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.

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