Debt Ceiling Deadline – Treasuries Send Mildly Mixed Message In July.

by Michael Matheron · August 1, 2011

Among commentators almost everywhere, this July was a month of growing worry about the likelihood of raising the debt ceiling. The Treasury bond market, often a bellwether of investor nervousness, basked in overall confidence, however. The 10 year Treasury Note, for example, actually rallied 40 basis points from July 1st through July 29th, the last trading day of the month, with yields dropping from 3.19% to 2.79%. In the face of a worrying outlook for Congressional action on the debt ceiling and deficit, this was quite a rally – a rather exuberant show of confidence (see chart below). Six month T-Bills, however, looked ahead at what it viewed as storm clouds and ran the other way, with prices . . . Please read on and see a chart that wraps it all up . . .

[Six month T-Bills, however, looked ahead at what it viewed as storm clouds and ran the other way, with prices] falling, and yields rising from 0.002 to 0.09, still a historic low yield even at 0.09, but a noticeable price decline nonetheless.

This divergence between the long and the short signals a reluctance to buy short-term treasuries with a six month horizon while the outcome of debt ceilings and deficits are so uncertain. But the rally in long term securities appears to be a bet that any injury to U.S. creditworthiness resulting from the debt ceiling drama will be relatively short-lived, otherwise we’d have witnessed a July swan dive in the 10 year notes. We saw quite the opposite.

With the government rapidly running out of cash, let’s hope the Treasury market has it right, especially the 10 year neighborhood. They’re supposed to be the “smart money,” after all. Yet, they’ve been misled and misleading before, many times; have we forgotten the pants down mishap of a few years ago? And then, particularly in the unknown waters we still sail upon, as Donald Rumseld once lectured us – there are those unknown unknowns . . .