Long dated Treasury prices fell almost two points on speculation the Federal Reserve may have to speed up its reduction of asset purchases after the fastest inflation in three decades.  As previously remarked, according to Bill Gross formerly of PIMCO, over the past several years the Fed has purchased 60% of net Treasury issuance.

Currently the central bank is buying $120 billion in mortgage back and Treasuries every month.  Who will make this difference as the Fed commences tapering, an environment amplified by $1 trillion deficits for the for see able future?

The selloff in Treasuries was the catalyst for the nominal sell off in the NASDAQ as higher interest rates will discount the value of present and future cashflows.  As noted many times, the only time the NASDAQ was more highly valued than today was 2000.

Oil was essentially unchanged as the President continues to face calls from lawmakers to tap US crude reserves, a move that most will agree will only have a short-term effect.  Some believe a release has already been priced into the market and if a release does not occur prices might spike more than rationally expected.

The Empire Manufacturing Index was released yesterday. The Index posted considerably higher than expected reading as orders growth and employment accelerated, while an index of selling prices increased to the highest in data back to 2001.  These regional surveys are volatile but it was the depth of the data that was surprising.  Bloomberg writes “pricing pressures are at a boiling point.”

Returning back to the Treasury market, most will acknowledge the lack of liquidity.  Options and futures expire Friday and typically “calendar rolls” are a pedestrian event.  However, because of the “erosion of liquidity the switch out of December expiring futures into March has the potential to cause causalities given the extreme volatility of the last six weeks” according to JP Morgan.

Barclays Plc warned this week’s “futures expiation puts global bond market liquidity to the test” and to take provisions for “the potential deterioration of market liquidity.”

Are these warnings of any significance?  Or are they just sensationalist headlines?  Most are perplexed, myself included, that the long end of the bond market has rallied in the face of the greatest inflation in at least thirty years.  The accepted rational for the advance is a preemptive Fed.  However, is this confidence unfounded given the massive miss of the last 18 months and perhaps the last 12 years?

What will happen today?

Last night the foreign markets were up. London was up 0.17%, Paris up 0.43% and Frankfurt up 0.45%.  China was down 0.33%, Japan up 0.11% and Hang Seng up 1.27%.

The Dow should open flat.  The 10-year is up 2/32 to yield 1.61%.  Natural gas prices in Europe surged 12% on potential delays in starting a new controversial pipeline from Russia.  Oil is up about 1%,


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