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Daily Market Commentary

Yesterday saw a massive reversal in the rally we saw for bonds on Monday.All the action is in government bonds, as credit spreads seem stuck.Whenever we see huge equity market rallies such as yesterday, we turn to the credit spreads to see if the rally is confirmed by the bond markets.While spreads stabilized and moved slightly in from their depressed levels, the exuberance of the equity rally was not reflected in the bonds.In particular, Citigroup, which we watched closely after selling extraordinarily high yielding paper, did not have huge moves. While their bonds narrowed to + 188 basis points over the 10 year Treasuries, their moves downwards over the past several weeks have been sharper. Coming off a low of + 205 bps,this paper is behaving slightly better, but still at historically wide spreads.The TED spread, a financial stress index, at 220 is approaching the August highs.With the TED spread this wide, it brings into question the effectiveness of Central bank rate cuts.

Durable goods orders were weak for the second straight month. Bonds regained some of their earlier losses.The latest US home sales numbers come out at 10am and we expect them to be disappointing.

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