Are we headed back to the days of ‘risk off’?

It certainly looked like it last week with the market worried about slowing growth in Europe and about a hard landing in China.

The most striking indicator to me was the reversal in the Treasury market. After climbing for the week that ended on Friday, March 16, in the aftermath of the Fed’s slightly more positive take on the U.S. economy, Treasury yields fell this past week as investors looking for safety bid up prices. (Yields fall on Treasuries as prices rise.)

Yields on the 10-year U.S. Treasury notes fell the most since January, dropping from last week’s five-month highs. Yields fell 0.06 percentage points to 2.23% for the week that ended on March 23. That almost exactly wiped out the increase in yields of 0.27 percentage points in the week that ended on March 16.

The risk-off trade that alternated with period of risk-on trading in 2011 is characterized by flight to dollar and yen denominated assets, selling of emerging market currencies, bonds, and equities, and relative outperformance by “safe” markets such as the United States against “risky” markets such as China or Brazil.

Of course, the shift from risk-on to risk-off takes a bite out of all markets as investors in “safe” markets sell the riskier assets in those markets.

The strength of the “risk-off trend” will get a test in the upcoming week when the U.S. Treasury is scheduled to auction $99 billion in two-year to seven-year maturities.

If yields still drop even in the face of that jump in supply, it means that investors are looking for safety again and are willing to pay a big premium for it in the Treasury market. If that’s the case then I’d say risk-off is likely to last for a while.

The rout in the Treasury market continues: Yields on the 10-year note close at 2.38%, up from just 2% a little more than a week ago

Last week’s inflation numbers with the Consumer Price Index rising a steeper than expected 0.4% in February to push the annual headline inflation rate to 2.9% haven’t done anything to put the bond market in a better mood.

On March 16, the day of the inflation announcement ,10-year U.S. Treasury notes fell taking the yield to 2.31% at noon New York time. That was a huge change from Monday, March 12,  when the benchmark U.S. 10-year Treasury yielded just 2%.

This week hasn’t begun any better. The 10-year Treasury note fell in price (which means they climbed in yield) for the ninth straight day. The yield on the 10-year Treasury rose to close at 2.38%, the highest yield since October 28, 2011.

Last week’s inflation numbers reminded bond buyers that at 2% or even 2.3%, 10-year Treasuries are losing ground to inflation. Read more

On Wednesday, January 25, the U.S. Federal Reserve said it would keep interest rates at their current exceptionally low level until the end of 2014. Forget about the middle of 2013, which seemed extremely far away when the Fed made that “guarantee” in August. And forget about the beginning or middle of 2014. Now the Fed is talking about the end of 2014.

Almost three years from now. Three years with short-term interest rates near 0%.

Let’s cut straight to the chase for investors: Who wins and who loses from this extraordinary statement of policy by the U.S. central bank? Read more

Fear continues to climb.

You can see it, of course, in the stock markets where the Dow Jones Industrial Average is down 2.72% as of 11:56 New York time and the Standard & Poor’s 500 stock index is down 3.09%. Things are even worse in this morning in Europe, the driver for today’s extreme fear, where the French CAC index is down 4.02%, the German DAX index 3.52%, and the Spanish Ibex 3.89%.

But for real evidence of the extent of the fear look to the Treasury market where investors are flocking to U.S. debt—and we all know how safe that is in the long run. Buying has dropped the yield on the 2-year note to a record low of 0.2803%. The 10-year bond yields less than 2.5% for the first time since November 2010. Go out 30-years and the long bond is paying 3.743%. That’s a drop in yield from 3.90% yesterday.

The level of fear is drowning out anything vaguely positive and we have had two mildly positive bits of news this morning. Read more

Bond market yawns at U.S. default and buys $35 billion in 5-year Treasuries at today’s auction

Still no buyers strike or even a whiff of panic in the market for U.S. Treasuries. Although global stock markets sure are getting anxious.

Today’s auction of $35 billion in five-year notes doesn’t rate as a rip-roaring vote of confidence as Congress fiddles with raising the U.S. debt ceiling. But the Treasury Department sold these notes with a yield of 1.58%. That was a small increase from the 1.562% yield in the market just before the auction.

The bid to cover ratio, a measure of how many bids there were for each dollar of bond offered in the auction, was 2.62. (There were $2.62 in bids for every $1 in the auction, in other words.) That was higher than the 2.59 of a month ago, but below the average of 2.84 in the four previous auctions of five-year notes.

Indirect bids, a pretty good proxy for buying by foreign central banks and other overseas investors fell to 36.6% from a recent average of 41.8%.

The five-year Treasury note closed for the day at a yield of 1.52%