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How the Bond Markets React Someone called it an intellectual exercise. Some folks have said that the lack of pricing power at the pumps (gas actually has come down) proves that the current move towards $50 a barrel for oil is really not much more than speculation.
Now put yourself in the place of some third world country whose government is swimming in profits generated by their leading export, oil. That money will provide little good or solace when the country faces the threat of terrorism or political unrest. In fact, it is exactly that likelihood that has, despite huge oil reserves that has kept many of these countries at junk bond status forcing them to look for somewhere to put these profits.
With a short term default risk, the only thing left to do is invest and with Asia beginning to lose some interest in carrying the debt of the U.S. as they face their own increasing growth woes, the oil producing countries have begun to pick up the slack.
This has been good for the Treasuries markets. It seems that every time oil tested a new, all-time high, the stock market had a knee jerk reaction. With the exception of last week when stocks moved higher by 3% - heady, but quite possibly short-lived - the high oil prices have benefited the government securities.
Many of these countries are looking for a short term answer to their problems and tying their oil cash to the dollar, the currency of choice for several of these newly made billions. They seem to be turning their collective heads away from some of the worrisome problems on the horizon of the U.S. economy. Those bulging deficits will be a long term problem which when coupled with terrorism, trade imbalances, and now, lackluster forecasts about economic growth with the election just around the corner, these new customers flush with oil money has bee very welcome. The question is, how long will it last?
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