Goldman: Treasury Markets No Longer React To Economic Data

For all the younger traders in our audience, we would like to inform you that maybe not now, but once upon a time, markets actually used to respond to economic data. That includes both stocks as well as the market that has been historically considered far “smarter” than equities, the Treasury market. Sadly, as central banks took over, the significance of economic data released declined until recently it has virtually stopped mattering, something we predicted would happen back in 2009 when we warned that soon the only financial report that matters is the Fed’s weekly H.4.1 statement.

Today, some six years later, Goldman picks up where we left off nearly a decade ago, and asks “Does the Treasury Market Still Care about Economic Data?”

What it finds is simple (and something even the most lay of market observers these days could have told them): no.

As Goldman’s Elad Pashtan writes, “the sensitivity of US Treasury yields to economic data surprises has declined to near record-lows over the last two years. We find that the pattern of reactions to data surprises across the yield curve matches pre-crisis norms—with higher sensitivity for short-term rates than longer-term rates—but the average reactions are much lower; for breakeven inflation reactions to growth data are not discernible from zero.”

So if it is not the economy, then what does the “market” respond to?Take a wild guess:

In contrast, Treasury yields have reacted more strongly to Fed communication, at least according to one measure of policy surprises, and the sensitivity of exchange rates to activity news has increased.

Here are the details:

Economic data “surprises”— the difference between reported values for major economic indicators and consensus forecasts—have had a limited impact on US Treasury yields lately. Typically, Treasury yields rise on news of stronger-than-expected economic growth as investors anticipate either higher inflation and/or tighter monetary policy, and fall on news of weaker growth as markets discount lower inflation and/or easier monetary policy. In recent months, yields have had a much smaller reaction than normal to these types of data surprises. In Exhibit 1, we show the estimated impact of a 10-point surprise in our MAP index—a scaled measure of US growth surprises—on Treasury yields by year, controlling for changes in both risk sentiment (using the VIX index) and oil prices. The impact on 2-year yields has fallen to the lowest level since 2012, and the impact on 10-year yields has fallen to the lowest level since our dataset begins.

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Gary Anderson 5 years ago Contributor's comment

The main reason treasury bonds do not react to market data is that they are in demand apart from usual demand. They are in massive demand as collateral and other specific financial reasons. They have a life of their own. That is unnerving. But it has been known for sometime.

Andy Sutton 5 years ago Author's comment

Treasury bonds are instruments of the USGovt. We can all agree on that. They are backed by the 'full faith and credit of the USGovt'. That is the statement made by Treasury officials and while I think that statement is an utter joke, I think we can all agree that is the mantra that comes forth. If the economy does well, then the government should (in theory) be able to meet its debt obligations. if the economy is in the toilet, such ability might be called into question. So yes, Treasuries used to respond to economic data - appropriately - and the fact that they don't really do that anymore should be a point for everyone to ponder.

Maybe it's like Gary pointed out - that hungry buyers see Treasuries as the cleanest trash out there. I know I certainly wouldn't take my hard earned money and loan it to an entity (at a negative rate) when i know that entity is in debt way over its head and has absolutely no plans of changing its behavior. But the dollar and Treasuries have always been the 'safe haven'. It's a hard habit to break, especially when everything else looks worse except for metals and I know that is really going to get some people going ;)

I certainly wouldn't call it misplaced fear when someone decides they want out of USGovt debt. Sounds a lot like 'flat earth' economics to me.

Gary Anderson 5 years ago Contributor's comment

Once in awhile someone like Alan Greenspan and others will try to throw a tantrum to get yields to briefly rise, but hungry buyers pluck those bonds up whenever someone sells out of fear, misplaced fear, IMO. That is just my opinion, and not investment advice.

Chee Hin Teh 5 years ago Member's comment

Thanks for sharing