[DcifrThs]

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Another trade today:

US 10yr yield is now just above 5.02%.

likely causes are 1) economist's survey reveals they feel new growth will not cause inflation so no rate hikes in the future (capacity hasn't fallen, so future demand must be expected to fall). in that vien, home depot & others have talked their forcasts down.

2) subprime downgrade possible for just over 12bil in securities by S&P. may cause demand for safe debt.

3) related to 1, possible slower growth & lower earnings and feeling that subprime mortgage market may still indeed spill over to consumer demand which has remained robust throughout.

i think there are some good reasons for the rally, but i feel it overshot and the yield we are seeing now is too low relative to current economic conditions imo.

so i'm back to being more strongly short the us10yr.

maybe a signal of around -50 to -60%

Barron

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i think it's time to stress this again as at this moment (11:09am July 18th), bond yields are trading at 5.018%.

inflation data is still pushing the upper boundry coming in at 2.2% core reading yoy and with June readings at and above expectations at .2% for headline and .2% for core respectively.

yes, crude oil is high which may depress consumption and bring out some slack in capacity. but there is an offset there too, high crude oil creates large surpluses in oil exporting countries. those surpluses find their way back to the US govt bond markets since a whopping 2/3s of other country savings are in US bonds. so net net, the effect of higher crude on bond prices may be anywhere from slightly positive (pushing yields down) to even: either way, not a big upside for bonds as many seem to think could be the case.

despite this, the economy has been very strong and is likely to continue to stay as such keeping capacity at or above its level of 81and change %. anything higher (i.e. leading indicators coming in tomorrow at more positive than the consensus -0.1% and/or jobless claims coming in below the 310k consensus) and we'll likely start to see more upward pressure on inflation.

we'll get some more data next week as advanced GDP and durable goods orders come in. i think these are likely to show strength and come in at or above expectations.

there is a risk in that the "spillover" fear is still imminent if consumption comes in as a result of reduced buying power of subprime homeowners. at best though, this will simply delay a rate rise rather than spark a rate cut (still a slight likelihood priced into the fed funds options markets).

capacity is too high, growth too strong, and inflation too close to uncomfortable levels for yields of 5.018% to be justified imo.

Barron