Not a sea change exactly... maybe a lake change...

Yesterday was an important day in coloring how 2007 will play out in the investment markets. The odds of some degree of Fed easing at some time increased dramatically. The yield curve, stock market, and swap spreads all had big moves. While you can't really call it a sea change, maybe a lake change. Or a tributary.

I'm watching the long-end of the Treasury curve for clues. Despite the big moves I mentioned above in various markets, the longer end of the Treasury curve had a tepid response, and today both the 10-year and 30-year are down slightly. In fact, the 30-year is down 9 ticks over the last 2 days, whereas the 5-year is up 4. If that trend continues, its telling you that we are only getting 1-2 cuts.

The next couple days/weeks will be important as well. Do we continue to steepen? Does the stock market continue to rise? Do corporate bonds tighten? My bet is these trends continue. Your best performers will be in the 3-5 area of the curve, corporate and mortgage-backed bonds. I like new production 30yr 6%. This coupon is at-the-money, but if you buy that long/intermediate-term rates aren't falling, there will be no refinance risk. There could be some borrowers who refinance into ARMs or what not as the curve steepens, but short rates aren't likely to fall that dramatically. On top of that, low home price appreciation should result in less mobility, further depressing prepays.