Friday, September 22, 2006

The big mo'

It looks like Europe and Asian investors are capitulating as well, as the bond market has rallied another 1/4 point overnight. I don't talk a lot about technicals on this blog, but I note that on an RSI basis, the 10-year has reached extreme over-bought conditions 3 times in the last 60 days. I don't need to tell you that the market eventually moved higher each time.

We get the Richmond Fed index Tuesday at 10AM. Its very similar to the Philly Fed that sparked the big rally yesterday. A strong reading would spark a serious sell-off, and confirm my suspicion that the Philly figure from yesterday was an aberration.

Meanwhile, the curve has steepened about 4bps in the last 2 days. 2-10 slope was as low as -8bps and is now -4bps. That's telling me the market sees cuts sooner rather than later. If the market thought cuts would happen eventually but more like 2008 rather than early 2007, we'd flatten.

Once again, I'm hawking the steepener bet. If you look at my scenario analysis from yesterday, I contend that in either of those scenarios, we steepen out.

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