<If there is a recession(and I think you and I agree one is coming soon)why shouldn't long term rates fall?.>
Rates aren't being set by Adam Smith free market forces, and I think that's where you go astray about all this. Instead merchantilistic interests and the rather unholy alliance of Asian CBs, Fed monetizers, GSEs, and Caribbean based pirates and funds go up and down the curve and just create their own little Alice in Wonderland market place, trading Old Maid Cards with each other (*). Now regulators are sniffing around on one of them, FNM, and China may just be coming to a new realization, and maybe even Japan as well. As they have distorted the curve, they now will need to get to shorter duration.
Completely away from these market distortions, longer rates will go up because of inflation, and short rates will stay low because of financial dislocation or even panic: i.e: selling in all the risky levered trades out there, and flight into very short term treasuries. I think it plays out as under one year flat, beyond two years higher rates. Will also be interesting to see how gold plays with this, but I'm still a little skeptical of the large fund positions.
(*) I know your persistently ignore the impact of intervention and money printing in the credit and bond market. I don't, pure and simple, I think THEY ARE THE MARKET. Who else is there, our folks, not really?
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