Stuyvesant Insight: The Flight to Safety Makes Treasuries Expensive

Recent flows into long duration Treasuries has resulted in yoy out performance of Treasuries relative to the S&P 500 that is currently approaching the one sigma mark, a sign of statistical significance (68% of data are observed between the one σ bands).  This is indicative of a prevailing pessimistic outlook with respect to both growth and inflation that has only occurred over two periods in the past decade, The Great Financial Crisis and The European Debt Crisis.

We believe that the current search for safety, resulting from the Brexit Vote, is becoming overdone and that the political response will be looser monetary and fiscal policy out of Europe, Japan, the U.S., and China.  This is likely to put a floor under depressed yields.  We believe that this valuation metric is evidence that the time is approaching to be sellers rather than buyers of domestic sovereign debt and will continue to look for opportunities to take profits in bonds.