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Daily Market Commentary

With a lack of hard data out today, we'll turn to technicals and take a look at the charts of the bond markets.   The 10yr treasury has rallied smartly back to  the 5 % level that was given during early June's selloff.  It's failure to sustainably break through  that level yesterday should be taken as a somewhat bearish sign, now that it has "filled in the gap" left by the huge decline of June 7th. (see chart in Daily FI snapshot).  Looking longer term, it appears the market is still somewhat oversold, but is now trading within it's 1st standard deviation (measured since the 50 year low yields of 2003).



  In a bigger picture, we are still expecting range-bound trading for the foreseeable future.  With no clear indication of the future direction of fed funds, we look to the data for any indications.  The sub-par growth of the economy is being offset by somewhat sticky inflation numbers that the Fed is worried about.  The economy refuses to drop into recession territory to this point, however.  For this reason, until the outcome of this tug-of war is over, we'd recommend taking conservative positions in the 3-5 year area of the curve.  While we see inflation remaining benign until the housing slowdown has played itself out (and there's plenty more pain to come...), certain shocks here and there could hurt the longer end of the curve.  In Canada, where our curve is still inverted somewhat, peak yield is around the 1 year mark.  We'd expect that to normalize as the market sees further out, with inflation concerns creeping into the very long end of the curve and yields out there reflecting a proper term premium.


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