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Daily Market Commentary

As the jitters seem to be easing for the time being, Treasury and Canada bonds are trading slightly lower while credit spreads are slightly improved on the morning.  the TED spread has dropped to 129, which by historical terms is still elevated and a cause for concern, but significantly  lower than the 220 we saw at the end of the year.


  Meanwhile the news out of the financials continues to be bad.  As Bear Stearns CEO steps down after major losses in the lending world, rumours continue to swirl about Citigroup taking another significant writedown.  TD also was rumoured to have a write down in the wings, but that was quickly denied by the company. 


It is interesting to see the pain continue in that sector while the rest of the markets seem to be almost shrugging off the bad economic news.



  The Financials are certainly leading the pack to the downside, as ML's big economic cheese Rosenberg claimed that the recession is already underway, joining PIMCO's bond guru Bill Gross on that front.  Should that be the case, we should see lower rates in both Canada and the US on the short end as the central banks adjust their outlooks.  Expect inflation fears to fade from the radar screen as the jobs numbers come in weaker and weaker, along with housing price deflation.  This persistently high oil price certainly makes this call more confusing, as does gold hitting new all time highs, but employment and inflation are sticky, and will always lag downwards as the economy slows.



10 Year Canada bonds, currently @ 3.85% seem very expensive, but remember if we get a true growth scare here, a spike to only 3.70% (the cycle low yield from June 2005) in the next six months would produce an annualized return of 12%.



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