Wednesday, September 22, 2010

OT: US Treasury 10-Year Note Price vs S&P500 Index

There are analysts and traders who watch the positive correlation between S&P500 index and 10-year Treasury note yield. They point out to the most recent divergence where the 10-year note yield continues to go down without S&P500 following suit, and draw a conclusion that the stock market is just about to follow the 10-year note yield and that means a major market crash yet again. (Here's the chart by Karl Denninger today as one such example.)

However, when one compares S&P500 index and 10-year Treasury note price (which generally have the negative correlation with each other), the divergence doesn't seem that striking.

People tend to see what they want to see, much like a Rorschach test.


SOMA System Open Market Account at the Federal Reserve New York Bank
Primary Dealer A bank or securities broker-dealer that may trade directly with the Federal Reserve System. Primary Dealers are required to bid at Treasury auctions. Current list of Primary Dealers is available at New york Fed.
Indirect Bidder Supposed to be the foreign investors, both foreign central banks and foreign private investors
Bid to Cover ratio The number of bids received divided by the number of bids accepted. The higher the ratio, the higher the demand.
Reopening The U.S. Treasury issues additional amounts of a previously issued security. The reopened security has the same maturity date and coupon interest rate as the original security, but with a different issue date and usually a different purchase price.
Cash Management Bill (CMB) A short-term security sold by the U.S. Department of the Treasury. The maturity on a CMB can range from a few days to six months. The money raised through these issues is used by the Treasury to meet any temporary shortfalls. CMBs tend to pay higher yields than bills with fixed maturities, but their shorter maturities lead to lower overall interest expense.
Supplementary Financing Program (SFP) A program initiated by the U.S. Treasury Department at the request of the Federal Reserve in September 17, 2008. The cash raised from the auction will be used in the various Federal Reserve initiatives to support the financial markets and manage its balance sheet.

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