Well roll is pretty much over (although still 400,000 plus open interest in Sep 10yr is kind of scary, probably PIMCO holding still) and the curve has steepened massively since the last post (nearly 20 basis points in the 2-10yr curve). Some very large paper is continuing to commit to huge steepening trades, especially Goldman, who did 10,000 FOB steepeners today (buying fives and selling bond). Basically no one wants to be long the bond if there is a possibility that the Fed may not raise for the rest of the year and maybe cut next year. I thought this flattener trade would be good until inversion of 2-10's, but old Greenie didn't let that happen and we had the ramifications of Katrina. Still not much has changed, no inflation and weakness in manufacturing with tepid job growth. Am I missing something?
NO inflation? Any thoughts on Maskow this afternoon - rising inflation pressures need to be addressed with ``appropriate'' increases in interest rates.
Why? A dovish Fed, as you suggest, and potential "debt liquidation" in the near future (of the junkiest junk used in leveraged carry trades) might even provide a bid under Treasuries overall (less so for the long duration perhaps), wouldn't they? I mean, IMO one might not want to be long the US bond, if he thinks that true inflation is much higher than CPI suggests and future inflation will be higher (because if USD issues). This is what I think personally. But many people think there's no inflation and if Fed thinks so too and stops at 3.75% or starts cutting in 2006, why would then "noone want to be long the bond"? Not to mention that governments might force pension funds to match duration of liabilities, forcing them to buy this stuff. What am I missing?
It just seems like the paper that was long the bond as of late through flatteners has all of a sudden thrown in the towel and gotten short 30yrs (didn't necessarily mean noone, but the curve guys don't want it). Gross makes a valid point in the Sep Investment Outlook that the better "value" lies in the front end of the curve and that owning the long bond may be trouble if the Greenspan "risk premiums" were to rise in the long end. I guess my point being does anyone want to get long the bond at these levels right here around 116. I really don't buy the inflation bit from any of the Fed guys, they are just trying to slow down housing. So, if the cooling has already occured or is about to, the long bond seems a good buy here, as yes, the Fed may have to ease in the future as a result of the housing fallout. Although I wouldn't be suprised if this thing continues to get beat up until the Sep Fed meeting where hopefully we all gain more clarification (although high CPI would completely change my outlook). Just my opinion.