Financial markets had reportedly been rattled by concerns over rising debt default risks.
As the chart from Bespoke Invest shows, US Credit Default Swaps (CDS) or the cost to insure US debt spiked as global markets swooned.
But it's a different tale when seen across the US yield curve: Treasury yields fell or bonds rallied!
If indeed the markets have been apprehensive about the default risks from government debts then US treasury yields should have risen as these would have come under strain. Fear of default translates to higher yields. But this didn't happen.
In short, bond markets have exuded inconsistent signals.
In my view, the markets seem to be enduring from the uncertainty brought up by conflicting indicators; where policymakers have generally turned hawkish, as they repeatedly or have been bombarding the press with talks of 'exit' strategies (or even experimenting on it as with the credit arm twisting tightening in China) amidst current markets conditions, whereby key financial markets have essentially been heavily dependent on government steroids, and by the state of sovereign overindebtedness, as a result of collective efforts to mount a rescue of respective national economies.
In other words, the markets appear to be violently responding to the prospects of policy (or liquidity) withdrawal and have used the debt default risks as an excuse for the recent actions. They maybe asking, without money printing who'd finance all these debts?
We may call this the withdrawal syndrome.
Here's our guess, continued pressure on the financial markets risks undoing the animal spirits and resurrect the specter of 'deflation', and thus, would prompt authorities to turn from hawkish to dovish.
As the chart from Bespoke Invest shows, US Credit Default Swaps (CDS) or the cost to insure US debt spiked as global markets swooned.
But it's a different tale when seen across the US yield curve: Treasury yields fell or bonds rallied! If indeed the markets have been apprehensive about the default risks from government debts then US treasury yields should have risen as these would have come under strain. Fear of default translates to higher yields. But this didn't happen.
In short, bond markets have exuded inconsistent signals.
In my view, the markets seem to be enduring from the uncertainty brought up by conflicting indicators; where policymakers have generally turned hawkish, as they repeatedly or have been bombarding the press with talks of 'exit' strategies (or even experimenting on it as with the credit arm twisting tightening in China) amidst current markets conditions, whereby key financial markets have essentially been heavily dependent on government steroids, and by the state of sovereign overindebtedness, as a result of collective efforts to mount a rescue of respective national economies.
In other words, the markets appear to be violently responding to the prospects of policy (or liquidity) withdrawal and have used the debt default risks as an excuse for the recent actions. They maybe asking, without money printing who'd finance all these debts?
We may call this the withdrawal syndrome.
Here's our guess, continued pressure on the financial markets risks undoing the animal spirits and resurrect the specter of 'deflation', and thus, would prompt authorities to turn from hawkish to dovish.
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