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Down the Valley of the Shadow


‘Over the Mountains
Of the Moon,
Down the Valley of the Shadow,
Ride, boldly ride,’
The shade replied,—
‘If you seek for Eldorado!’
–Edgar Allan Poe

I don’t post a lot about the Treasury Note market – its the largest most liquid market in the world and as such it doesn’t move a whole lot during the course of the day.

However, check out the chart above of the yield on the 10-year Treasury note – that big valley in the middle of the chart is absolutely frightening. Kudos to Charlie from our staff here at the bank for bringing this to my attention. The question the two of us have is why didn’t the stock market drop 1,000 points?

To give you a feel for what this chart is saying, the yield on the 10-year note fell from roughly 2.2% to 1.85% almost instantaneously. The implication there is that a huge buyer came into the market, driving up the price (supply/demand dynamics at work) which drove down the yield.

For that to happen, either the buyer would have had to have been sitting on a bunch of cash earning nothing (doesn’t seem reasonable) or they were sitting on stocks that they had to sell to generate the cash to buy the notes. Well, since the stock market didn’t drop with the yield, that didn’t happen either.

Was it something synthetic? A derivatives contract or some futures contract? Did one of the big Wall Street Banks do something crazy or make a trading mistake?

What has me baffled is that after that spike down you see, the yield stayed low until close to the close of the market where you see it moved back up toward where it started the day, down only 2%. Did the Federal Reserve or the US Treasury come in and start selling bonds to drive the yield back up?

I am not sure we will ever know the answer to these questions, but whatever happened it is not the sign of a healthy market absent of manipulation. If something from the shadows can make this happen in the treasury market which is significantly larger than the stock market, how much manipulation is there is the stock market that is out of your control?

I’ll leave you with that as I ponder more of Poe’s poem:

By Edgar Allan Poe

Gaily bedight,
A gallant knight,
In sunshine and in shadow,
Had journeyed long,
Singing a song,
In search of Eldorado.

But he grew old—
This knight so bold—
And o’er his heart a shadow—
Fell as he found
No spot of ground
That looked like Eldorado.

And, as his strength
Failed him at length,
He met a pilgrim shadow—
‘Shadow,’ said he,
‘Where can it be—
This land of Eldorado?’

‘Over the Mountains
Of the Moon,
Down the Valley of the Shadow,
Ride, boldly ride,’
The shade replied,—
‘If you seek for Eldorado!’