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The Bond Markets will be in flux for some time to come as a sea change takes place in the Global Environment. One of the World's biggest borrowers - the US Government, has been running a bit of a surplus and is even considering buying back some outstanding debt. The treasury has also stated that they will be reducing the amount of 30-year bonds being offered for auction as well as reducing the number of times per year that they will offer them.

This sounds like great news for the American taxpayer but is it?

There are upsides as well as downsides to this story as there were downsides to the end of the High Inflation of the 80's. If you think there were no downsides to the end of that inflationary period just look at what the savings banks are paying on their passbook accounts.

To get to the point, as the US Government absorbs Less and Less of the available credit, lenders will bid up the prices of the available paper. This will further drive down the yields. There will still be more cash than paper or the available yields will be too low for the lenders, These people will then move their cash to more risky, higher yielding debt or equity.

A recent article on CBS Marketwatch stated that 99 would be a record year for Junk Bond defaults, almost $64 Billion.

Is the Fed finished with its Rate hikes? For now yes. They have already stated that they will provide liquidity to the Banking institutions for Y2K. After we get through the worry period and we see the sun still rises in the East, the Fed will again focus on the Equity bubble. A Dow drop of 50% in one year is not impossible. It may even happen in one month. Bonds would not be immune from this type of catastrophe, as people will be forced to liquidate their holdings to cover margins or settle positions.
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