No. of Recommendations: 4

One tid-bit I would add to the pricing of Treasuries is what I see as the sloshing water in at tub problem. Despite the losses that were sustained by many, a truly immense amount of wealth was created when the tech revolution caught hold. As the dot.bomb detonated some of that wealth was lost but obviously a great deal of new wealth was created and survived, we can see the visible parts of that iceberg on the balance sheets of companies like ORCL, CSCO, MSFT and INTC among many others.

With the maturing of the tech revolution and the carnage of the dot.bomb folks had to find a place to put this new wealth to work. The typical pattern was a flight to safety and this time for both demand and economic reasons the rates never returned to pre '98 "normal". With the dearth of money and highly friendly Fed Funds rates the money sloshed into the "one thing that can never lose value" real estate.

Again many folks dramatically increased their wealth and flew to safety.

The great unknown is where are folks willing to put their money next. Bond's have little room left to run. Real Estate is recovering from a train wreck, there is no full trust in the stock market and the gold bugs and now the silver bugs are crowing "too the moon baby".

Personally I don't think QE2 can budge that barge dramatically. Fear of stock losses, fear of real estate losses, fear of Europe's financial woes are driving people to precious metals and stable sovereign debt.

In the theory of the sloshing water in a tub water has to spill out somewhere, especially when the tube is filled to the brim.

To put this in some perspective the 2.26% - 2.3% inflation anticipated by the Treasuries market was off often by more than 100 basis year over year. The Treasury market is not perfect in its prescience but that is a steep penalty to pay, they were off by 33% - 50%. Or put it another way people did not price the risk either because they underestimated it or, more likely, they were willing to live with mitigated losses relative to their other options.

To put it another way pre '99 mid to long Treasuries were often priced with two components inflation and at least some participation in GNP. The pre 99 market actually was paid to take on inflation risk. From 1991 to 1997 inflation ran 3% as measured by CPI, The Ten Year Treasury ranged from 1/2/91's 8.05% to 7/1/93's 5.4% and started '98 out at 5.66%. The Ten year, during this era, was not attempting to price inflation but price national growth.

A fundamental shift occurred in this market and currently endures.

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