Big NOB trading in ten year pit, 5000 bought so far working a bunch, was short NOB as hedge few weeks ago on big cash unwind, starting to cover here, has at least 10,000 more coming is my guess (sold 17,000 two weeks ago).
"Reflections on the Yield Curve and Monetary Policy" --Stone & McCarthy (Princeton)--Fed Chairman Ben Bernanke is scheduled to address the Economics Club of NY Monday evening (7:00pm EST). His speech is entitled "Reflections on the Yield Curve and Monetary Policy". Market participants will pay particular attention to what Bernanke has to say, because the speech precedes his first FOMC as Chair by only a week. So What Will the Chairman Say? We doubt that he will say anything about the near term prospects for policy other than what he already has said. On this front in the semiannual monetary Policy testimony (Feb 15) before the Senate Banking Committee Bernanke indicated that he was in agreement with the FOMC's January 31 Post-FOMC statement including the statement that "...some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance." To say more, at this point, would violate the spirit of what is perceived likely to be a more democratic FOMC than existed under Greenspan. But what Bernanke will do is lay out his thinking on the chosen topic, the yield curve and monetary policy. On this front the Chairman will likely pull together and restate ideas, which he has previously espoused. He may take some time to explain the rationale underpinning the flat yield curve and the low longer term interest rates in the face of what has to-date been a cumulative 350 rise in the fed funds rate. He will probably underscore 2 considerations on this front. First, he will argue that the increased transparency of monetary policy has improved the ability of financial market participants to anticipate the path of monetary policy over time. This in turn has reduced the volatility of longer-term interest rates and has reduced the term risk premium of interest rates. He may reflect on evolution of Fed transparency starting with the post-FOMC announcement in February 1994 when the Committee increased rates, to where it is today. And he may reflect on how the Fed could become still more transparent, such as providing more explicit detail on their internal economic forecasts. Presumably this would allow market participants to evaluate high frequency economic statistics relative to the forecast to garner a sense of the trajectory of policy. He will undoubtedly talk about the role of inflationary expectations, and how the credibility of the Fed in anchoring these expectations is paramount. He will argue that low and stable inflation expectations is key to the Fed's other mandated objectives of maximum sustainable growth and employment, and moderate long-term interest rates. The Chairman carefully delineated his thinking on this topic on February 24 at Princeton The (Benefits of Price Stability). He indicated that the objectives of price stability and growth and employment were not in conflict even in the short and intermediate run. His thesis, one which is largely embraced by central bankers now days, is that low, well-anchored, inflation expectations allows the central bank to respond to economic disturbances without jeopardizing the prospects for future inflation. Low, well anchored, inflation expectations provides investors with the assurance that price stability will likely be maintained, and that the trajectory of the funds rate over a long period of time will be reflective of low inflation. Since longer-term interest rates are ultimately a reflection of expected time weighted trajectory of short-term rates, low inflation expectations represent a critical component of the explanation of the flat yield curve. On this front the Chairman may suggest that assigning a numerical target to the concept of price stability may further enhance the Fed's ability to anchor inflation expectation. Although, he will offer the disclaimer that this is something that requires further extensive FOMC debate and discussion. He may also address the issue as to whether the yield curve is now a harbinger of economic distress. He has indicated in the past that the yield curve is not serving as a leading indicator of a recession or a material slowdown in activity this time around, and he will likely hold to this view. His argument may note that the actual level of interest rates is not overly restrictive, and that curve is saying more about long term inflation expectations, than incorporating a view requiring cyclically responsive prospective changes in the funds rate. That said, Bernanke has acknowledged the work of FRBNY economist Arturo Estrella, The Yield Curve as a leading Indicator,(Oct 2005) who documented the empirical regularity that the slope of the curve as a predictor of future economic activity. Don't expect the Chairman to say that the Fed will stop or pause at 4-3/4% or any other specific rate. He has already embraced the notion delineated in the January 31 FOMC minutes that "...the stance of policy seemed close to where it needed to be given the current outlook". Surely, he would regard being anymore specific as an affront to the Committee. Bernanke is looking forward to chairing a collegial committee, one in which open debate characterizes the meetings. He will not take the policy decision out of the hands of the Committee.
Looking for yields to drop on the 90day now too. Not buying the treasury though. I'm still long the 2yr. Also looking for another leg down in the 10yr/30yr price (higher yields). Looks like a normalizing of the yield curve to me.
Reflections on the Yield Curve and Monetary Policy http://www.federalreserve.gov/BoardDocs/speeches/2006/20060320/default.htm