Buried Treasure

As we opened up trading for 2012, commodities and stocks got off to a hot start. Encouragingly, we have been getting good economic data here in the USA, including today's better than expected ISM manufacturing index results. With today as the first day of the new year, and fresh capital to return to the markets, I think it is too early to draw conclusions about our direction. However, equities did move higher toward the end of 2011, and to see this follow through is a positive sign. But rather than break it all down, I would prefer to point out that this has not led to a sharp sell off in treasuries. While treasuries have not been rallying, they are staying remarkably well bid. Through the stock market rally of the last two weeks, the ten year has managed to stay below 2%. Whether or not you believe this pop we have had is a sign of risk on or not, it is important to note that demand is still strong from treasuries.....whether that is because the US government is buying them covertly....ehhh we'll probably never know.

On the same topic, I recently read that there is decreasing foreign demand for treasuries in a piece attached to a recent "Mineset" mailing (Mineset is a letter I receive from known gold expert, Jim Sinclair). In the letter, Sinclair attaches quotes from an article by Michael Mackenzie who points out that "Holdings of U.S. Treasuries by foreign central banks has fallen by a record amount over the past four weeks according to the latest Federal Reserve data." So while there is demand of late, it is no thanks to foreign banks.

Investment demand for US treasuries is complex. We cannot simply say that demand or lack there of is a sign of any grave danger or miraculous rally. It is important to note such allocation of capital however, because it can help us from getting too caught up in common assumptions. What's bullish for stocks may not be bearish for bonds and vice versa. Let's not see the treasuries rally big one day when the stock market is down and profess that it is because investors are "fleeing for safety". I mean who has ever heard reporters toss that baseless term around to simplify a story? Despite a positive US data backdrop and robust looking stock market, treasuries are still the toast of the capital allocation town.