Treasury Notes and Bonds showing signs of trouble – massive budget deficit can be the catalyst for the deflation causing factors
Marla Guthrie
Mar. 10, 2007

The slight fall in unemployment rates created devastation in the Treasury Notes and Bonds in spite low job growth and other signs that the economy is headed for a deep recession. Analytics that track news and its effect on financial instruments are sending a severe warning signal for the Treasury Notes and Bonds market.

The strength of the economy is very weak. The real estate and manufacturing sectors are leading the massive slowdown. The Treasuries rallied very nicely as the stock market came down. That is normal at the start of a deep recession especially when the economy is plagued with deflation and stagflation.

What is surprising is the effect of neutral news from the job front on the Treasury Notes and Bonds. Analytic and Quantitative models point out that it is normally seen before massive problems in the fundamentals.

Most likely the budget deficit factor is playing a heavy role here. The bond market understands that as the economy heads for a deep recession and while collar unemployment in financial services sectors spread like a wild fire, the tax revenues will be lower. As a result, the deficit will increase even further even though some tight fiscal measures are taken.

The inability of the bond market to trade higher (lower yields) is a major cause of deflation. Deflation will go worse if the rates cannot come down. That is a very big negative for not only the bond market but also for stocks, gold, real estate and many other financial instruments. The gainer is obviously the Dollar.

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