Tuesday, April 28, 2009

Treasury Rates and Investor Sentiment

Treasuries at the longer end of the curve rallied strongly and rates came down sharply (see chart above) in mid-March, when the Fed announced a quantitative easing policy. Since that time, however, stocks have rallied steadily and 10-year rates have crept back to the 3% range.

This is another example of a nice sentiment gauge: as traders and investors fear economic decline, they seek a safe haven in Treasuries and rates fall. When confidence in economic recover takes center stage, traders and investors are willing to pursue riskier assets and sell Treasuries, pushing rates higher.


OKL said...

Yes, that is the traditional inverse relationship between treasuries and equities.

However, I do think there's a little oddity going on and this doesn't exactly translate to any tradable trades.

My view is that with a record amount of supply on the way, "april-june09, treasury expects to borrow $361b, jul-sep09 $515b... from jan-mar09, treasury borrowed $481b", the traditional inverse relationship might be changed- but this change would be huge.

There is a little nuance going on... to put simply, with the debt levels, fiscal/budget deficit reaching record levels, a rise in long term interest rates could increase the borrowing cost for the Fed/Govt, which would in turn cause the deficit to widen further.

Not to mention that China and the Gulf Nations are not exactly pleased that the Fed is clearly inflating the debt away.

Like I mentioned, there isn't anything tradable, but because it involves geo-politics/military, the longer term view of US Treasuries are safe to say, a little uncertain.

Brett Steenbarger, Ph.D. said...


I think your idea is spot on and one reason some portfolio managers are bearish on long dated Treasuries--