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FRONT PAGE CONTRIBUTOR

Bond Markets Showing Some Very Strange Action

Unexplained Disruption

This post will be brief, as duty calls. You don’t need me to point out the broad carnage in financial markets this morning. It’s going to be a tough day.

Margin calls will drive a lot of selling. We may get a brief respite rally after all of the weaker hands get washed out. Time frame for this would be the next several weeks.

No news in capital markets. Everything is still locked up tighter than a drum.

The most disturbing new sign this morning is in the bond market. US Treasury debt has not rallied strongly this week, as you expect it to when times are tough everywhere else. The very front end of the yield curve is sharply lower, with T-bill rates again nearing historic lows.

But farther out the curve, Treasury securities are mostly flat to lower. In some cases, yield spreads between Treasuries and swap interest rates at equivalent points on the yield curve have become negative.

That is portentous and hard to explain. It could be nothing. It could be the market trying to digest a lot of new and unusually-structured issuance by the Treasury this week.

Or it could be the start of a global deflation. Pray that we’re not seeing the latter.

-Francis Cianfrocca

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