Wednesday, September 3, 2008

Is this Just a Depiction of Flight to Quality?

Not quite sure how to interpret the charts below....

While the strong correlation between yields and equities surprised me (a lower discount rate for dividends or cash flows should make the equity more valuable... all else equal), the one year chart (below) is what interests me. Specifically, the rally over the past few months in Treasuries without the corresponding sell off in equities... at least thus far.

My initial thoughts... investors aren't rotating further away from equities to Treasuries as they have in past "flight to quality" moments. Rather, they're rotating away from short-term "enhanced cash" instruments that have gotten slaughtered / no longer exist (think ABCP, Agency Notes, and securitized "short-term" floating non-agency mortgages).