Tuesday, June 2, 2009

Treasury Tuesdays

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There's been a fair amount of talk/analysis regarding the Treasury market's recent sell-off. The above chart is a 5-year chart of the IEFs (7-10 year treasury) which places the move far more in context.

Prices spiked in 2008 for a simple reason: the stock market was selling off. The SPYs went from 145 to 90 -- a drop of 38%. At times of panic, investors look for safety. This is what lead to the big move into Treasuries. In addition, at the end of last year and the beginning of this year there was continual talk of depressions and severe recessions. Also note the SPYs fell an additional 22% at the beginning of this year.

The recent Treasury sell-off started right around the time the stock market started to rally. In other words, what we're seeing in the Treasury market is a reallocation of assets from low risk to higher risk assets. Also note prices are still above the levels that existed in 2004-2007 when the economy was growing. This tells us that a further sell-off wouldn't be as large a problem as commentators are arguing.