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Who's calling the treasuries tune?

It has been a rough roller-coaster ride for the US treasuries market over the past three months, and there are sure to be financial institutions hurting as a result.

Bog-standard prop trading losses will cause some of the pain. But it is banks' addiction to mortgage product over the past 18 months that could cause the real damage. It's not the easiest product to hedge at the best of times. There are two basic choices - sell treasuries or sell the swap - but in the kind of whiplash treasury markets of late it is nigh on impossible to hedge effectively.

As recently as mid-May, the yield on the 10-year bond was hovering close to 3%, the lowest in more than 50 years, having tightened almost a full percentage point in a month.

By the end of July the 10-year had widened by 145 basis points in six weeks. The Fed had eased interest rates at the end of June, by 25 basis points. Fed chairman Alan Greenspan, in his semi-annual testimony to Congress at mid-month even stated that there was still room to ease further. Bond market participants clearly didn't think that was relevant.

Lucky for some Those who made the right - perhaps that should read lucky - bets on these movements will have made a pretty packet.

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