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In Friday's trading the tension between the short end and long end of the US Treasury spectrum saw some rather dramatic adjustments. Surges at both the long and short end were seen but it was the two year note which was the biggest surprise as it jumped almost 30 basis points. The chart above is an ETF which tracks the prices of 1-3 Year Treasuries (NYSEARCA:SHY) and the large gap down in Friday's session indicates the magnitude of the surge in yields.
There were also indications from the Fed Funds futures that traders are now factoring in increasing probability for rate hikes from September onwards.
The moves of last week were addressed in my Daily Form commentary last Tuesday and in particular in the comments on the Five Year yield (second item)
There is one theme which I am confident about which is that, unless we get another major leg down to the rolling financial crisis, the bull market in US Treasuries which carried from the October 1987 crash until December of 2008 is over.
Yields on the five year note saw the largest relative jump yesterday and I would expect that as long as traders in equities and commodities continue to push the reflation agenda the market’s focus will move increasingly towards the shorter term securities, in particular 2 year notes.
Re-reading that comment today (June 7th) it would seem that the reflation traders are winning and that in fact the Fed blinked first, and it was revealed in Bernanke's remarks in Washington last week. Whether things will continue to play out well for the reflation traders and badly for those hoping to refi mortgages is less clear and it may be that the Fed (and equity markets) will decide that even if emerging markets deserve a bid, the US consumer is still tapped out.