Interest Rate Roundup

Monday, August 14, 2006

When everybody's on one side of the boat ...

Treasury prices and Treasury yields have been largely rangebound these past several weeks. We've been trading between roughly 4.9% and 5.25%, yieldwise, on the 10-year note. In the past few days, however, the rally that sent 10-year yields roughly 35 basis points below the federal funds rate started petering out.

Fundamentally, retail sales were stronger than expected in July and we just learned that Europe's economy grew at the fastest rate in six years in the second quarter. Beyond that "big picture" stuff, it's worth pointing out that too many bond traders are loaded up on one side of the boat. Look at what Tony Crescenzi at just had to say about the latest Commitment of Traders report on Treasury futures ...

"In the week ended Tuesday, large noncommercial traders added 63,000 contracts to their existing long position, bringing their collective net long to 261,215 contracts, the second-highest tally ever. The previous record of 263,723 was set in the week ended March 21, at the precipice of a large selloff in the Treasury market."

In short, the "dumb money" is super-long Treasuries on a bet that the Fed will engineer a perfect soft landing, with growth slowing enough to cool inflation pressures. We'll see this week if that's a sucker bet -- both the July Producer Price Index and July Consumer Price Index will be released.


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