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Daily Market Commentary

Very interesting action in the markets yesterday.  They started with the same old, investors buying equities and ignoring bonds.  Around 2pm, the equity sell off started and the bid came to the short end of the yield curve, pushing the two years higher by a dime.

  The credit markets had already been trading slightly weaker after TD came in a sold a $2.5 billion 5 year fixed floater.  It came at a 9 bp discount to similar paper, and met in the middle in secondary trading, tightening in by 4 bps as the rest of the market priced down by 5 bps.  We've now seen massive issuance from all the banks at significant discount to market, both in bonds and preferreds.  All these issues have sold extraordinarily well, but they are serving to keep credit spreads wider as they are continually issued at big discounts to market.  All this issuance makes us wonder why the banks are loading up the coffers.

US PPI was in this morning, slightly stronger than expected (although the core is remaining low), and the long end of the bond market is selling off in response.  We're convinced the long bonds are too expensive, and there are long term inflation worries that have yet to be priced in the 15 year + bonds.  As the US comes through this soft economic spot, the curve should normalize more in the form of long yields rising some more.

Retail sales were strong as well.  US consumers keep spending on stuff they "need" - proving again that as long as they are employed, they will spend money.

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