Individually, none of the data points from today was very compelling. But considering that PPI, Industrial Production, Capacity Utilization, NAHB Index, and the Beige Book were all strong, it stands to reason that we are selling off. The 2-year is actually attractive in my mind, for the first time in a while.

Its time to at least think about what the curve would look like if we get no Fed cuts in 2007. It depends mostly on what inflation looks like at the end of this year. If inflation picks back up toward the end of the year, then the curve will move in a bear steepener fashion. 2-year 5.45%, 10-year 5.75-6.00% depending on the severity of the inflation fear. For this scenario to pass, housing probably has to be clearly in a recovery, and economic indicators have to be pointing positively. That will have the market fearing more rate hikes in the future.

Alternatively, we could get a Goldilocks scenario, where inflation remains low. That probably means that housing is slowly recovering and consumer spending is tepid, but income figures and business investment remain strong. In this case, the market will still probably see Bernanke's next move as a cut, so the curve remains inverted. Most likely very near current levels. Of course, if the curve basically remains right here it is, the best spot on the curve will be in very short-term bonds. Owning anything longer than 2-years will just be a drag on carry.

Personally, I still think we'll get a cut or two. That's going to make the 5-10-year area of the curve as the best performer.