T-Bond trading comment (September 19, 2007)

We confirmed the bearish strategy we outlined yesterday and that was simmering for the past week. Early last night, we opened below the 112-16 level and from there on, we just went lower. With equities on the strong side the market tanked more than a buck until 11h30. This is when equities stopped climbing and started to give some ground. From there, we partially reversed the loss on the T-bond but still, the long bond is bleeding lot more than its shorter comparses...

The reasons behind this fall are inflation and slowing economy according to me. We're just finished with inflation reports and yes they were not very scary at first look. But dig in deeper and what do we see? Inflation ramping up in food, medical services and services. This kind of inflation is harder to kill of than energy inflation and that is not good for a 30 years bond as you might expect. The second pressuring factor on the T-bond is the belief that the economy is going to slow and maybe enter in recession. This factor coupled to a Fed rate cut and you obtain curve steepning. How do you put a curve steepner? you sell the long end and buy the short one. In addition to these fundamental reasons we were also running out of steam on our bull summer bull run.

We do not have any other major economic release for the week. Friday is option maturity day so we might stick to the 112 figure which was where we were on the first trading day of september