No. of Recommendations: 14
Yeah, treasuries falling in a panic is a very troublesome omen.
The prevailing theory is that a lot of this is related to unwinding of the very crowded basis trade among very leveraged hedgies. That's the strategy of buying actual bonds and selling bond futures with the same maturity, as there has been a small pricing gap you could arbitrage with "essentially" zero risk. The gap is small, so players have been applying a large amount of leverage. To unwind that position they have to sell bonds and buy futures. The basis gap has widened in the last few days, roughly doubling I think, which lends credence to the explanation.
Additionally, some unknown part will be non-US entities simply not wanting to hold US assets any more, including treasury bills and bonds. I sold all mine for precisely that reason, but I have no idea if there are others who might feel that way.
The US dollar has also been falling, which is also the exact reverse of what you usually see during a panic. That one is harder to explain away, other than that the US dollar is not seen as a haven asset so some non-US players (again, like me) are dumping it for other currencies. Given that multiple members of the US team have explicitly stated a goal of dropping the dollar's value against other currencies, it doesn't seem crazy.
Jim
