Here’s a riddle for you: How do you get the price of the 10-year Treasury to jump up a point at the open? It’s easy…you just cut the credit rating.
This is gonna be huge
When I was a kid I remember hearing stories about the fabled M80 firecracker. Legend held that these things could blow up toilets and mailboxes and nothing could cooler in the mind of a 9-year old than that. We were all experts on the destructive force of the M80 despite the fact that none of us had ever actually seen one. That all changed one day when we one of our friends went on vacation and came back with a whole bag of them. Fate had smiled upon us. We suddenly found ourselves in possession of a big plastic bag full of fire-engine-red M80 firecrackers with thick green and white fuses sticking out of them. It was a bag of mayhem if such a thing ever existed.
We couldn’t wait to start blowing things up…nothing was safe from our plotting…toilets, mailboxes, trees, dumpsters, cement trucks…nothing. We held a power more awesome than any group of 9-year olds had ever held in history…and we were about to use it. We figured the first one ought to be set off just by itself so we could witness the sheer power of it…to establish a baseline of sorts before we began the real experiments.
After a few seconds of trying to decide how far back we should stand, and who would light it, we got underway. The fuse was lit, I was running for cover, everyone was plugging their ears in anticipation of the huge explosion that was coming…and…pop. We got virtually nothing. Something was wrong…our M80 didn’t really do anything. We lit another one with almost as much anticipation as the first…and pop. Same result. No earth shaking explosion, no asphalt raining down on our heads…just a pop and the smoking cardboard wrapper of the M80 laying in the street.
We were crushed.
It didn’t work like we expected
The folks at S&P must be feeling the same type of disappointment this morning. Late Friday afternoon they mustered up the courage to downgrade the long term credit rating of the USA. They likely had a vision of borrowing rates sky-rocketing, politicians scrambling for cover, and creditors howling on TV demanding solutions…basically they had visions of exploding toilets and mailboxes.
Rather than cause yields to move higher and politicians to beg forgiveness and come up with fiscally responsible solutions…borrowing levels are dropping as investors buy up all the freshly downgraded Treasury debt that they can. Our trading desk relayed to us this morning that desks around the country have been given orders by large customers to buy all they can on the dips. If prices drop, people want more.
If you were holding your breath in anticipation of an M80 type explosion in the Treasury market you might want to relax a bit…early indications are that it’s going to be a pop…not a boom.
The markets
There is a tremendous amount of liquidity in the market, there are still huge problems in Europe, and people still view the US debt market as the safest place to be…so we rally. The 10-year is currently up over a point and a half and is trading at a 2.37%.
Stocks are off across the board with US indices down anywhere from 1.5 to 2.5 percent at this point…and it will likely be a bad day…all day…for stocks.
Oil is off $2.66 a barrel to trade at $84.15.
That’s the short story…I’ll keep you informed as things change. If you have any questions or if there is anything I can be doing for you just let me know.
Steve Scaramastro, SVP
800-311-0770
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