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Bond Outlook February 8th

The long T-Bond reappears just as the yield curve looks like inverting, and probably helping that effect. Inversion is probably a sign (but not the cause) of the coming slowdown.

Bond Outlook [by bridport & cie, February 8th 2006]

The return of the 30 year T-Bond symbolises the complete turnaround, since 2000, of US Federal financing. Remember the boastfulness of the Clinton Administration when it declared that the country had a healthy and growing Federal budget surplus, and that it no longer needed long bonds, rejecting the market’s plea to keep issuing at that maturity. For the last five years government financing has been far cheaper at 2, 5 and 7 years than even at 10, never mind 30. Now the Fed has lifted short-term rates to a point where the Treasury has been pushed along the curve to 10, and, this week, to 30 years. The demand for reopening the 30 year USD long bond will be strong: it is already trading at 11 bp lower yield to the existing 2031, in other words flat to the 10 year! European governments have successfully issued long over the last few years. Many institutional investors have steadily sold bonds of medium maturity to have the cash available for the new 30 year. Once the 30 year auction is over, there should also be an improvement in prices of medium term US bonds.

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