Don't blame the Dems

The bond market has been grinding higher the last 3 sessions after last Friday's blood bath. Today I keep seeing headlines saying Treasuries are advancing on the Democratic sweep of the legislative branch. I don't think so. I think you had fast money move the market lower on Friday, but so-called real money accounts pushing it higher the last three days.

I'm basing this on three things. First, I'm hearing from a lot of small dealers that anything in inventory not nailed down is getting lifted. If someone like Morgan Keegan or First Tennessee is seeing their 500 bond Freddie Mac positions lifted left and right, that's banks and smaller money managers, not big hedge funds.

Second, spreads are moving tighter in MBS and corporates. If hedge funds were pushing the market around, they'd be doing it in derivatives, which would leave spreads at best unchanged. Probably wider.

Finally, hedge funds and prop traders (i.e., fast money) like to trade the number. In other words, they are the ones who tend to move the market whenever big economic releases cause a large move, like last Friday. Real money tends to form a generalized economic opinion that doesn't change from day to day, regardless of that day's economic number. So when you I see several days of small moves all in the same direction, its indicative of long-term buyers entering the market.

So what's that telling you? There are two possibilities. Either more money managers are becoming convinced by the bearish economic forecasts, or its simple portfolio squaring. I think the later. The most recent piece of major economic data was positive, so I don't think PM's were convinced of the bearish thesis by anything that's happened in the last two weeks. However, regardless of my position, I'm always looking to square my portfolios. By that I mean, get cash that's accrued to work. If a PM is already bullish on rates, he wouldn't wait around much with cash, jumping in with bids anytime there is a sell-off.

To me that sounds a lot like the last three days.