Deleveraging Creates Bubble in Treasury

Wednesday, December 24, 2008 | posted by RedApple
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We all know that Oil has retreated from its summer high of 150usd to 38usd and during the same period 10y note has rallied from 4.27% to 2.08%. The initial deleveraging and the subsequent shutdown of the credit market forces unwinding of risky asset to raise capital. In many countries, the only way raise money is sell hard assets which led to the oil sell off. In addition, the Fed rate cut and massive risk aversion led to zero percentage t-bills and the bond market rally. Both assets seem to have moved in an extreme manner due to the crisis condition of the financial market. Should we see any relief of the present condition, we expect unwind of some of these moves.

Look at the chart below showing the ratio of 10y Treasury price versus WTI crude oil, are we approaching a bubble territory? While, deflation can last longer and risk aversion may continue for a while, this is one bubble we are watching.