Abdullah Karatash

Stocks opened feeling very giddy about the weekend "deal" (ignoring that Congress actually has to agree to it before it becomes law).

By the end of the day, stocks had given up their gains as the back and forth between lawmakers continued.

Treasury bonds were well bid, particularly on the back of very weak ISM manufacturing numbers; at this rate, the yield on the 10 year Treasury bond could get as low as 2%.

The important point is that with or without a debt ceiling agreement, the recession that started in 2008 is still here with us.

This is not the hackneyed "double-dip" recession that pundits love to talk about; the real economy never recovered from the first dip for there to be a second dip.

It was always only a matter of time before the exuberance of the markets came back in line with weak underlying macroeconomic realities.

Credit spreads continued to out-perform today relative to stocks with some large real-money players (West coast guys) vacuuming up corporate bonds.

Despite this technical demand, we could still see a significant widening in corporate credit spreads in the medium term.

A further leg lower in the markets (caused by unemployment, the European sovereign mess, or developments in the Middle East) will push investors back into the relative safety of Treasury bonds.

Not to fall behind a benchmark, real-money players will follow suit and rush into Treasury bonds as well (and dump corporate bonds in the process).

Some of the savvier hedge funds already have a version of this trade on: long Treasury bonds vs. short stocks.

When one considers that the trigger-happy Federal Reserve will pounce on any excuse to print more money, the demand for Treasury bonds does not seem so crazy after all…despite threats of a ratings downgrade…