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Daily Market Commentary

Bonds took it on the teeth again yesterday, starting another week in the red.  The ten year US Treasury is now 4 points (or 50 basis points) off of its mid-January highs.  Technically, we are at an important level, testing the 50 day moving average (see yield chart on pg 3 of Daily FI Snapshot). 

 

 

  Yesterday's selloff continued despite equity indexes moving lower over the afternoon.  The was a strong whiff of inflation yesterday and the bond market was spooked.  The 30 - 2 year yield spread has reached levels not seen since June of 2004, when the curve was sliding its way towards inversion.  A steep curve is the correct response in this environment, as long term stench of inflation given off by $100 oil, $1000 gold and sky high food prices is being juxtaposed against slowing growth and a very dovish Fed.  Remember the Fed has little control over the long term rates (and as we are starting to see - less and less control over the short term as well

 

 

  To keep the worrying high in the credit markets, we have another potential failure of a SIV in our midst.  These Structured Investment Vehicles basically are a basket of longer term obligations (mortgages, bonds, debentures) that are funded by short term paper.  The Canadian ABCP market is a form of SIV.  This morning, Standard Chartered PLC of London was unable to refinance its $7 billion SIV.  If the banks that are backing these SIVs can't or won't step in to provide funding, they will collapse and their assets have to be sold to whatever buyers there happen to be in the market.  That is unless the current holders are willing to accept longer term paper for the short term products they had originally bought (just like the ABCP holders who now have 6 month old "30 day" paper).  This pushes down the value of mortgage loans and credit even further, driving risky credit yields ever higher.... no matter what the central banks are doing.

 

 

  US CPI is out this morning, speaking of inflation.  The official government statistics confirm the pricing action in the commodities pits yesterday, coming in slightly higher than expected.  Year over year headline @ 4.3%, and core @ 2.5%.  There is lots of speculation as to whether or not the CPI numbers reflect the reality of the inflationary backdrop, but these sticky high CPI numbers and the recent steepness of the yield curve would argue some correlation.

 

 

Lots of other data as well, check out today's snapshot for details.

 

 



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