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The 10yr yield...


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has been moving like a champ lately. Two days ago it was at 3.85. Today it is 4.10%. This, imo is entirely due to the enormous US debt sales that began this week. Over the next 60 days, the federal gov't is selling hundreds of billions of dollars more of short term treasuries which is flooding the world market. The first three days haven't gone so well. There is little demand and PLENTY of supply thanks to our Congress running enormous debts. By the time the US is done selling debt over the next 8 weeks, the world's investors will be choking on this stuff. As you can can see with yield jumps, week #1 was nothing short of a disaster.

Mortgage rates are more or less = to the 10yr yield + risk premium (spread). The spread has widened significantly to account for the reality that real estate is not a sure bet for lender anymore (ie: real estate is not magically immune to asset price fluctuation). So now we have a rising 10yr combined with an already widened spread. In my humble opinion, real mortgage rates will do nothing but go up from here through 2008. Could get ugly this summer if the 10yr continues to climb as mountains of treasury debt is sold into world markets.

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Pretty interesting recovery today, dont you think jq26?

Treasuries Rebound as ECB's Stark Downplays Rate Speculation

By Sandra Hernandez and Ye Xie

June 11 (Bloomberg) -- Treasury two-year notes rebounded from their biggest back-to-back decline in at least 20 years after a European Central Bank official damped speculation the central bank is about to raise interest rates multiple times.

ECB board member Juergen Stark's comments that the bank isn't ``talking about a series of rate increases'' sparked a rally in bonds in Europe and the U.S. The Federal Reserve said economic growth was ``generally weak'' in April and May as consumer spending slowed, while manufacturers in ``several'' regions passed on higher raw materials costs to their customers.

``The market is finding a footing here,'' said David Ader, head of U.S. government bond strategy in Greenwich, Connecticut, at RBS Greenwich Capital, one of the 22 primary dealers that trade with the Fed. ``Yields will be headed lower. The Fed won't hike. The economy will weaken a lot more. Inflation will follow the weak economy.''

The yield on the two-year note, the most sensitive to interest-rate expectations, fell 12 basis points, or 0.12 percentage point, to 2.81 percent at 5:35 p.m. in New York, according to BGCantor Market Data. The 2.625 percent security due May 2010 rose 7/32, or $2.19 per $1,000 face amount, to 99 21/32. Ten-year yields fell 3 basis points to 4.07 percent.

The two-year yield advanced by 51 basis points from June 6 through yesterday, the biggest back-to-back gain in at least two decades.

`Flight to Quality'

Bonds also gained as shares of financial stocks dropped to their lowest in four years on concern that writedowns and losses may increase at firms including Lehman Brothers Holdings Inc.

`` There continues to be concern about financials,'' said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., a primary dealer. ``There's a flight to quality.''

Speculation surged in the past week that global central banks were about to switch from rate cuts to boosts amid signs that policy makers are more concerned about keeping inflation under control than heading off a slowdown in the economy.

``The market very quickly and abruptly priced in aggressive moves by the Fed, which was perhaps unwarranted and overdone,'' said John Spinello, chief fixed-income technical strategist in New York at Jefferies & Co. ``We have room to rally.''

German two-year government notes rose, pushing the yield down 3 basis points to 4.63 percent.

``It's the bullishness in the European bond market that's underpinning a firmer tone in the Treasuries,'' said Richard McGuire, a fixed-income strategist in London at Royal Bank of Canada, the nation's biggest lender. ``Stark appeared to be indicating that any rate hike will be to fine-tune inflation expectations rather than a significant shift higher.''

McGuire said his strategy is to sell Treasuries, as inflation concerns will continue to dominate the market.

Beige Book

Seven of 12 regional Fed banks reported a softer, slower or ``modest'' expansion. Five districts reported that business was ``stable or little changed,'' the central bank said in its regional economic survey, known as the Beige Book for the color of its cover.

``The economy remains fragile,'' said John Canavan, a fixed-income analyst in Princeton, New Jersey, at Stone & McCarthy Research Associates. ``It's premature for the Fed to do anything that will worsen that situation. The market may have to reverse the rate hikes that have been priced in.''

Traders see an 82 percent chance the Fed will raise its 2 percent target rate for overnight lending between banks at least a quarter-percentage point in September, down from 87 percent yesterday, futures on the Chicago Board of Trade showed. The likelihood of a half-percentage point increase fell to 32 percent, from 36 percent yesterday.

Yield Spread

A survey of Bloomberg users forecast government bonds will fall in the Americas, Asia and Europe over the next six months as global inflation accelerates. Treasuries, German bunds, Brazilian notes and Hong Kong bonds may depreciate as yields increase, according to the monthly Bloomberg Professional Global Confidence Index, which questioned 4,533 users from Rio de Janeiro to Frankfurt to New York.

The yield spread between two- and 10-year notes was 127 basis points, compared with 118 basis points yesterday, after Fed Chairman Ben S. Bernanke pledged to ``strongly resist'' deterioration of public confidence in stable prices. The gap has narrowed from this year's peak of 207 basis points in March. The so-called flatter yield curve indicates investors have reduced bets the Fed will cut rates.

Demand for protection against rising costs has grown as the prices of oil and other commodities have surged. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes widened to 2.52 percentage points from 2.28 points at the end of April.

Fink on TIPS

Laurence Fink, chief executive officer of BlackRock Inc., said investors should consider putting money into TIPS, which protect against rising inflation by paying interest at lower rates than regular Treasuries on a principal amount that grows with increases in consumer prices. BlackRock, the largest publicly traded U.S. money manager, was given $1 billion to invest on behalf of a client this week, said Fink. He didn't name the investor.

``Inflation is a real problem,'' Fink said at a Dow Jones deal conference in New York. ``I am very worried.''

Conventional Treasuries, whose fixed payments are eroded by inflation, had their first two-month decline in April and May in almost a year, according to Merrill Lynch & Co.'s Treasury master index.

U.S. consumer prices rose 3.9 percent in May from a year earlier, matching April's pace, a Bloomberg News survey of economists showed before the Labor Department reports the figure on June 13.

After subtracting the inflation rate from 10-year yields, investors are getting about 20 basis points. The average difference over the past decade was about 2 percentage points.

To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net

Last Updated: June 11, 2008 17:42 EDT

Even with an oversupply of T-bills, the world markets still reguard them as "safe" vs the stock market. As the financial filings of banks and other industries continue to stutter in the face of this recession, money will drive itself into bonds. At least, until the market discovers exactly what the government is writing t-bills from, diseased MBS and CDO paper from such highlights as Bear Sterns. And even then it will take a near apocalyptic disaster in the US financial situation before bonds are seen as unsafe and money flees into precious metals and commodities. You have to remember the rates on savings accounts isnt helping anything either.

I would bet that yields will remain low until the Fed starts reacting to inflation. Then, there will be hell to pay.

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