No debt deal, buy Treasuries and the US$?!

While global equity markets are disappointed with the pathetic showing of DC politicians, US Treasuries bizarrely are cheering as the 10 yr note is bouncing with the yield falling to match the lowest level since Sept on a closing basis. And the US$ is rallying too. If you ever want to hold politicians feet to the fire, have your bond market revolt, as currently being seen in Europe. In the US, the response is backwards. Fed actions however to monetize US debt and their suppression of interest rates has put off the needed market discipline unfortunately. Also, Treasuries have the benefit of trouble in Europe. To sum up the lack of a deficit reduction deal is that there was NEVER a discussion to actually CUT spending. There was only a debate of what the growth rate should be of spending that would continue to rise. With automatic ‘cuts’ now likely to kick in, understand that these aren’t really ‘cuts’ but a slower rate of spending than previously planned over 10 years. The Spanish conservative party won in a landslide as expected but bond yields are moving higher and stocks are falling as time will be needed to witness results from changes to their economy. The euro basis swap continues to get more expensive by 6.5 bps and US$ 3 mo LIBOR is up again to just shy of 50 bps, the highest since July ’10.

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