Saturday, February 04, 2006

US economy is growing nicely...commodity prices are out of control...sell long bonds.

So the US employment rate is now down to 4.7% (numbers came out yesterday)...yet by the end of the day, US Treasuries end the day higher...yielding essentially the same as the FED's base rate (4.50%). Why is this too tight? Well, check out a broad-based commodities index which I've attached, we have not seen commodities moves of this magnitude since the 1970's and 80's when inflation was high and interest rates were higher! It seems to me that there is a great risk of the value of money being eroded, as higher commodities = lower purchasing power.

So locking up money for an extended period of time becomes a risk. Therefore going with this logic you have to short 30yr Treasuries. They closed Friday at 4.63% (having touched 4.72% at one point after payrolls), I'll be shorting £10 a cent of 30yr futures when the market opens (i think the duration is ~14 without checking my bloomberg, so = £140 a basis point).

I'll post a note of the level I get it done at. With the market pricing the FED going to 5.00% now, the risk seems to be of 30yrs making a medium-term move to 5.50% not 4.50%, so I'm loving the upside/downside here.


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