US Bond Prices Soar: No, It’s Not Good News

The 30-year bond has actually gained more than a point in early trading after the S&P downgrade!

Thus far at least, Friday night’s downgrade of US bonds has not had the dire impact many feared. Indeed, while the stock market is continuing its recent slide/correction, the 30-year bond has actually gained more than a point in early trading!

Charlie Homans and the Modeled Behavior team point me to an excellent post by Brad DeLong from way back in April, when S&P was signaling such a move, explaining why:

[N]ews comes in flavors: new news, old news, no news, and political news.

If S&P’s announcement were new news being conveyed to the market we would have expected to see the standard pattern that we did not–dollar down, Treasury nominal interest rates up, equities either way. So it is not new news.

If the announcement were old news we would have expected to see no price movements–the smart money would already have taken up their positions, and when those less-informed investors to whom S&P was news responded by selling the smart money was there to buy and offset. That’s not what we saw either: so it is not old news.

If it were no news–if the market as a whole simply thought that S&P was irrelevant–then we would have expected to see no price movements at all. The problem is that we did see price movements: both in equities, and in the dollar. So it is not no news.

That leaves us with political news.

What would we have expected to see if we were to read S&P’s announcement not as a piece of information produced by a financial analyst studying the situation but instead as a move by a political actor trying to nudge a government toward its preferred policies? What asset price movements would we have expected to see then?

He answers this with several paragraphs that ring true; I commend it to you.

Meanwhile, back to today, Karl Smith argues against the notion that this is somehow the market smacking down S&P.

In my mind the political mess in Washington was worth a downgrade. And, indeed, I felt less safe than I did a month or two ago about the world and the fate of humanity.

However, what should I do in response to that? I should buy US Treasuries. Yes, buy.

Why?

Because you cannot escape US default risk. Its not like you could go out and buy something else that would guarantee you income in the event the US government defaulted. I am not even sure that investing in farmland or other wild schemes would do it.

Certainly there is no place to stash the trillions of dollars that now sit in Treasuries.

You have to buy Treasuries. There is no alternative.

This is why my reaction to the debacle wasn’t. OMG sell Treasuries. It was OMG we need to create an alternative to Treasuries and fast.

Hint: Don’t look in the Eurozone for a safe haven.

Photo credit: Reuters Pictures

 

FILED UNDER: General
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. john personna says:

    If the announcement were old news we would have expected to see no price movements–the smart money would already have taken up their positions, and when those less-informed investors to whom S&P was news responded by selling the smart money was there to buy and offset. That’s not what we saw either: so it is not old news.

    No. We live in an attention economy. Even if the facts were known, the attention was not focused like it is today.

    The S&P downgrade, the European downgrades, the threat of more European downgrades, all create an environment of short-term fear. Combine that with markets that had probably run ahead in irrational exuberance anyway, buying too much of a recovery, and/or too much inflation fear … there is plenty to happen this week.

    (Another way of saying it is that the market has a variety of feedback loops, and ratings are one feedback.)

  2. ponce says:

    It helps to remember S & P is the same rating outfit that rated all them sub prime mortgage backed securities AAA.

    Taking economic advice from them is like taking political advise from a discredited weasel like Dick Morris.

  3. hey norm says:

    @ Ponce…
    I’m sure Jan and Drew will be quoting Dick Morris any time now.

  4. Drew says:

    Breathing heavy, and running a neck and neck race with a turnip for IQ, hey norm observes:

    “I’m sure Jan and Drew will be quoting Dick Morris any time now.”

  5. jan says:

    Currently DOW down 4.2 % @ 484.60
    Gold up 4.2% @ $1720.50

    Interesting momentary juxtaposition of the market.

  6. jan says:

    Dow dives 500, B of A sinks 20% and Vix soars 45%

    Drudge is coining it “Barackalypse” with such headlines as:

    BUFFETT DOWNGRADED…

    S&P EXPANDS DOWNGRADES TO FANNIE MAE, FREDDIE MAC, OTHERS…

    ARE STATES NEXT?

    followed by the compulsory blame game of the progressives:

    Obama campaign blames Tea Party…

    Barney Frank blames military…

    I guess next they will be leafing through their phone book to see who else they can blame.

  7. An Interested Party says:

    Obama campaign blames Tea Party…

    And the reason they shouldn’t be blamed? If they hadn’t played their game of extortion with the debt ceiling, S&P probably wouldn’t have downgraded America’s credit, and the stock market wouldn’t have had such a drop…

  8. hey norm says:

    Damn…I was wrong…she quoted Drudge, not Morris. Tomato, tomahto.

  9. Drew says:

    I think the solution is clear, and I’m sure hey norm, putz and uninteresting party would all agree…………..kill the corporate jet owners. All will be well then.

  10. Drew says:

    I do have to make one observation, though. I thought Obama would take office and then leave with nothing but a “look at me” chariot ride. Well, I was wrong. He saddled us with a catastrophic new entitlement program. And now the first credit downgrade in modern history.

    Bravo, O-bozo.

  11. jan says:

    @An Interested Party:

    And the reason they shouldn’t be blamed? If they hadn’t played their game of extortion with the debt ceiling, S&P probably wouldn’t have downgraded America’s credit, and the stock market wouldn’t have had such a drop…

    Next, you and Norm will be blaming your parents for the economic mess we’re in. It’s gotta be someone, something else but who or what is really to blame, which are spending, debt and no good ideas, except to tax those who are holding it all together in the first place.

    BTW norm, Drudge is nothing but a composite website posting articles, opinions, breaking news from all sources. A while back the right was actually taking issue because they thought Drudge was tacking left in what it posted. Now the left is thinking, I guess, that it is tacking right. However, sometimes it’s just where the news takes you.

    At the moment the left has lost credibility, and is doing nothing but whining and obfuscating.

  12. jan says:

    @Drew:

    He saddled us with a catastrophic new entitlement program. And now the first credit downgrade in modern history.

    It was a monumental error to vote this man into office. He will go down in history as a smart man who governed foolishly, and was basically over his head as well as his ‘pay grade.’

    Unfortunately, all of us will have to suffer for his mistakes. But, in the meantime you will still have those who push progressive Keynesian policies, to the detriment of everyone, learning nothing because they refuse to see some of the life lessons staring them in the face.

  13. Ben Wolf says:

    Because you cannot escape US default risk. Its not like you could go out and buy something else that would guarantee you income in the event the US government defaulted.

    There is no risk of U.S. default. None. Zero. This is blatant scaremongering and ignorance of monetary theory.

  14. mattb says:

    @jan:

    I guess next they will be leafing through their phone book to see who else they can blame.

    Jan, as you so helpfully pointed us to on another thread, Rasmussen’s (which as you note is “better than most” as a polling companies go) early August polling found that “58% of [people who do not identify as members of the Tea Party] think the Tea Party has made things worse for the country [at least in terms of the debt ceiling debate].” (source: http://www.rasmussenreports.com/public_content/politics/general_politics/august_2011/29_say_tea_party_members_are_terrorists_55_disagree ht:Jan)

    So it seems that, according to this poll, it seems that Democrats, Independents, and non-Tea Party affiliated Republicans seem to agree with the idea that the Tea Party’s hard line stance might have damaged things. And note that poll, conducted on the 5th and 6th, was prior to the debt downgrade. It will be interesting to track where those numbers move in the days to come.

  15. An Interested Party says:

    I think the solution is clear…

    Actually, the solution is for you to hire better writers to provide you with some better material…surely with all the money you claim to have you should be able to do that…

    He saddled us with a catastrophic new entitlement program. And now the first credit downgrade in modern history.

    And were you bitching when the GOP saddled us with the last catastrophic new entitlement program? Oh, and you can blame that credit downgrade on your extortionist friends in the GOP…

    Next, you and Norm will be blaming your parents for the economic mess we’re in.

    Sure thing, if they too had played a game of chicken with the debt ceiling increase…

    BTW norm, Drudge is nothing but a composite website posting articles, opinions, breaking news from all sources.

    Sure, darling, sure…talk about losing credibility…

  16. jan says:

    @An Interested Party:

    The less a person knows about a subject the greater the attacks and condescension. That’s you, Interested Party, in a nut shell.

  17. An Interested Party says:

    Oh Jan, I’m stung by your assessment…how will I go on receiving such criticism from someone as credible as you…psst, try to sweep it away all you want, the “teas” still practiced extortion to get what they wanted because they couldn’t get it any other way…learn to deal with reality, darling…

  18. Ben Wolf says:

    @James Joyner

    One aspect of monetary and fiscal policy that almost never gets mentioned is the high demand for U.S. debt in the market. This isn’t something that’s going to change because:

    1) There is no other state which could absorb so much capital.

    2) U.S. Treasuries are literally as safe an investment as one can get.

    3) Issuance of U.S. debt is the only way markets currently have of draining excess reserves.

    4). Governments like China depend on the ability to buy U.S. debt in order to depreciate its own currency, enabling it to maintain a trade surplus with the United States.

    There’s simply no alternative.