The stampede that may never happen
The political train-wreck in the US is proving to be a win-win for the US bond market, even though a downgrade is looking ever more likely. Charts of how Japan and Canada were downgraded years ago and still saw yields decline have been trotted out, but these totally miss the point with regards to the US (not to mention all the other factors and forces pushing global yields lower over this period). We've talked before about the curse of the dollar's reserve status, limiting the market impact of the ever more likely downgrade. Two factors are more prevalent now. Firstly, the economic impact of a government running on 50% spending capacity which, if sustained, would likely push the US back into recession. Secondly, there's the impact of trade unwinds where the dollar/Treasuries is the short-leg. This will put a temporary downward force on bond yields. Add to this the fact that many investors in treasuries have little alternative for regulatory or liquidity reasons, then the rush for the exits that many have feared may never materialise. |
