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Pastimes : The Philosophical Porch
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From: Rarebird12/11/2006 12:28:07 PM
   of 26251
 
Bond Market Fragments:

Bond Market:

I just placed an order to initiate a position in RRPIX. After last weeks initial surge in bond yields, I expected interest rates to retrace some of the rally and provide an opportunity to buy interest rates. I am building a position on bond market rallies. The first order here represents only 20% of the ultimate position.

The bond market is just starting to realize just how wrong they were about the inflationary outlook and future Fed action. The Fed may realize before too long that they will need to raise rates even more. One adverse effect they have created by pausing in their rate hikes has been to give false hope to the bond market, pushing bond prices too high and interest rates too low. This has had the effect of inflating the bond bubble even further and negating some of the rate hikes the Fed had already put in place to rein in the inflationary pressure. By waiting this long, their job is made even harder and may result in higher short term rates to stamp out the inflation fires.

The Fed paused because they feared a recession was coming. But the economy is now re-accelerating and inflation will be a problem in the future. Inflation is the great enemy of the bond market and that is one reason why rising interest rates will be necessary in the future.
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