Why Treasury Rates Going Negative Today Is A Good Thing!

Published by Graham on

In the past few weeks, we have seen a total annihilation of every asset class, even the safe ones. Investors have been dumping assets at any price which is what lead to one of the fastest bear markets of all time. To see a drop of both US Treasuries (bonds) and stocks at the same time of this magnitude is quite unusual. There were only two years since the Great Depression where both asset classes ended the year negative, once in 1931 and again in 1969.

When Wall Street panics we usually see what is known as a “flight to safety” where Wall Street investors move their investments from riskier assets (stocks) to safer assets (bonds). This time was different… This time we saw a flight to CASH. Extremely unusual. My unproven theory here is that business owners were worried that they would need cash to make payroll and employees were worried that they would need their cash to buy stuff after they got fired. There were also some additional liquidity issues in the lending markets which drove institutional managers (pensions, firms, etc.) to cash as well

Today, however, we saw treasury interest rates dip BELOW 0% for a moment. Why is this significant? Why do you care? Because it means that instead of fleeing to cash, investors are now fleeing to less liquid assets, in this case, bonds! This is somewhat of a good sign for you and me as it indicates one of two things; first, that the markets are starting to function a little more normally now and, second, Wall Street is starting to believe that they can behave a little more normally as well. The latter may be decoupled from the former but perception often precedes reality so it may not even matter. “Normal” on Wall Street is sort of funny thing anyway.

Stay hopeful, my friends.