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Last August much of the talk was about the potential downgrade by S&P of U.S. Government debt and how it would push bond prices a good deal lower. In the short-term did the downgrade push the long bond lower or higher? The above chart reflects a 10 point rally in the long bond took place in short order.
Could the “long expected” down grade in European debt bring about a short-term rally, similar to the one that took place in the long bond last summer?
Aaron…Thanks for the comment and a very good one too!
My attempted point was not a fundamental one, it was a sentiment/crowded theme idea. Last summer the talk of the financial airwaves was “what will happen to the U.S. Bond should it get downgraded?” Bond traders are a pretty smart group of investors and leading up to the news, bond traders were not selling bonds, actually they were buying them. The “crowded theme” became, a downgrade will bring about lower bond prices.
Are the stories/concerns coming out of Europe real? I belive they are. What has these concerns created/caused traders to do? Take one of the largest short positions in years in the Euro. Has this become a crowded train/trade?
The U.S. Dollar has created a “Bearish rising wedge” (see post here) No pattern is a given, yet history would suggest a two-thirds chance the Dollar will move lower.
If the Euro would break higher would it cause the shorts to cover and create a short covering rally in the Euro? This has not happened at this time, it could pay to be open minded to go against crowded trades though!
Treasuries rallied because the downgrade showed there was trouble brewing, so people poured into the safest stuff they could find (US Debt). European countries are not safe havens, they can’t print money to pay off their bonds. Only the ECB can do that. The individual countries in the south (Spain, Italy, Greece, Portugal) can’t repay their high debt, and so the countries holding their debt got downgraded.