The stock market was crushed today, with the S&P 500 falling nearly 7%. The proximate cause of the mayhem: Standard & Poor’s downgrade of the U.S. government credit rating. But a funny thing happened on the path to demoting Treasuries: prices of these tarnished securities soared.
Accordingly, the yield on the benchmark 10-year Note went south by a comparable amount, falling 22 basis points to 2.34% as of 3pm today, according to Bloomberg. That’s the lowest yield since January 2009, when the Great Recession was raging and the world was rushing into safe harbors.
The message seems to be that the market took no notice of S&P’s warning about U.S. credit, at least in terms of the bonds in question. Fear is still a bigger motivator than credit reports. Prices on Treasuries are now higher (and yields lower) than they were at Friday’s close, before the world learned of S&P’s report. The U.S. isn’t likely to regain its AAA credit any time soon, S&P advises. But if lowering the country’s rating to AA+ has any downside for prices, the burden falls primarily on equities.
Treasuries, by contrast, are more popular than ever. There’s no mystery here. The S&P downgrade has heightened fears of macroeconomic risk. The crowd was already worried about a new recession and, well, you don’t have to be a genius to figure out what’s happened. In short, there’s a new rush into Treasuries, and gold, which closed above $1,700 an ounce today for the first time.
Some pundits continue to say that inflation is the main threat. But if that were true, would Treasury prices soar (and yields tumble)? Unlikely.
Higher inflation at this point would, in fact, be welcome. For the moment, however, there’s little sign that inflation is even stable, much less rising. That’s a problem at this juncture. The only question is whether it’ll become a bigger problem in the days and weeks ahead? Much depends on what the Fed decides at tomorrow’s FOMC meeting. No pressure, though.
“There is a one-in-three chance that we’re going to go into recession,” says Larry Summers, former director of the President’s National Economic Council and now a professor at Harvard. “Although it’s not clear how much impact the Fed can have, the risks are much more on the side of them doing too little than on the side of them doing too much.”