The Treasury market, counter-intuitively, rallied after S&P downgraded US debt. It was a perverse buying panic. In spite of Thursday’s selloff in Treasury’s and poor 30 year bond auction, it’s not clear that that panic has ended. One signal that it has ended might be weekly close in the 10 year above 2.25%. Until it does that, the stock market will be a source of liquidity propelling the rally in government paper.
There were chinks in the Treasury façade last week, not the least of which was continued weak indirect bidding, particularly on the 30 year paper.
Investors have good reason to be fearful. Tax receipts continue to compare poorly with last year. Deficits are shrinking in the short run because spending is down. That’s bad news because that spending is the primary prop for the US economy.
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