Prices of Treasury coupon securities tumbled today as someone magically flicked the “risk switch” to on today and risk assets prospered whilst risk averse assets languished. The headwind of seven year note supply ($31 billion) and the consumation of a week in which the Treasury regurgitated $123 billion in securities weighed on sentiment, too.

I think the main factor driving prices today was the flight to riskier assets. The dollar weakened against most other currencies as the safe haven bid into the currency faded.

Prices of Treasury coupon securities staged another impressive performance as the market showed unwavering strength into the teeth of record issuance by the Treasury. The market maintained its firm tone today despite a significant rebound yesterday.

Some of the same factors which influenced trading yesterday were at work again today.

Don't fight the tape - or, the trend is your friend. When putting on a large position try to go the way of the trend. That is not to say playing setbacks and reversals cannot be profitable -- many of my best trades were exactly that -- but position traders generally do not establish bearish plays in a bull or market or bullish plays in a bear market.

A few examples... short the indices, a trade our clients are in may not be the best call. Picking a top in gold or silver could be suicide in this environment.

While the U.S. equity markets rallied, the U.S. bond market did its best to tell us that economic growth was not going to be what the equity markets expected. Treasury futures held on to that belief as long a they could…until last Friday.

Whether the most recent move in Treasury futures is a correction or the beginning of a new downtrend will only be revealed with time. However, it does present a critical question for investors…

I must admit that I thought yields on T-bonds would be a lot higher by now. Despite the downward drift in yields since last June, I still expect them to move substantially higher, and today I breathed a sigh of relief. I was amazed at how complacent the bond market seemed to be, ignoring inflation signs such as $1000 gold and a falling dollar, and growth signs such as an across the board rise in commodity prices and sharp declines in swap and credit spreads (not to mention the surge in equity prices). My only explanation was that the market just couldn't believe that the economy would grow by any meaningful amount, even though it appeared to have avoided the calamity that was built into prices around the end of the year.

Prices of Treasury coupon securities put in a most bifurcated performance today with benchmark issue maturing in 5 years or less languishing whilst the gaggle of bonds with longer maturities loved life and lurched higher.

There were a variety of reasons for the significant curve flattening.

Prices of Treasury coupon securities have posted solid gains in today's trading. Most of the gains were subsequent to the announcement of the result of the 2 year note auction. I would have thought that the immediacy of the FOMC announcement tomorrow as well as the spate of supply on tap tomorrow and Thursday would have tempered the urge to buy.

That is not the case, and I am hearing of solid central bank interest in the belly of the Treasury curve as well as real money and speculative demand on the long end of the curve.

Gold breaking out is either the reflation trade version 48.148 or "uh-oh something bad is coming down the pike" trade ... gold has been in a big descending triangle getting narrower and narrower; when those break out in either direction it is generally a big move.

May - June 2009: $900 - $1000
July: $910 - $960
Aug: $930 - $970

Prices of Treasury coupon securities gyrated around today and made quite a bit of noise and are finishing with small changes.

The yield on the 2 year note is unchanged at 1.05 percent. The yield on the 3 year note increased a basis point to 1.56 percent. The yield on the 5 year note increased 2 basis points to 2.48 percent. The yield on the 7 year note edged 2 basis points higher to 3.09 percent. The yield on the 10 year note increased 3 basis points to 3.46 percent. The yield on the 30 year bond climbed to 4.22 percent.

The highest real (inflation-adjusted) yields in 15 years for Treasuries are boosting demand, Bloomberg reported at the end of last month.

Halfway through August, there's no reason to think otherwise. The 10-year's yield hasn't changed much in recent weeks, closing yesterday at roughly 3.59%. Meanwhile, inflation, as defined by the consumer price index, appears in no imminent threat of rising.

GDP = (A) Private Consumption + (B) Gross Investment + (C) Government Spending + ((D) Exports - Imports))

This is the question asked by many traders who want to tie the purported beginning of the bull market to some real fundamental improvement in the economy.

As the economy moves out of the slump, it is argued, the Fed will be forced to admit that it cannot keep rates at where they are for long without kindling the risk of rampant inflation.

Prices of Treasury coupon securities have posted modest and uniform gains in overseas trading.

There was a baseball announcer for the Brooklyn Dodgers (whose name I can't recall) who would sometimes proclaim that deuces were wild when there were two men on base and two out and sometimes the score might be tied two to two. Anyway, that statement is appropriate in the bond market as each of the benchmark issues registered a two basis point decline in yield overnight.

The legendary hedge fund manager Michael Steinhardt has recently voiced his distaste for Treasuries over the long-term. In a recent Bloomberg television interview, he said:

To be a long-term investor in Treasuries at this point I think is foolish. The rates are low, and the danger is high.

Here’s some food for thought from Nandu Narayanan, one of the few hedge-fund managers to have lived up to his industry’s promise to deliver positive returns regardless of market conditions (see table below for his investment performance). He argues that U.S. policymakers are going to need to administer much more quantitative easing and fiscal stimulus — and as the realization dawns on financial markets, they won’t like it.

The hard bitten investor in you is having thoughts like this as regards our current economic situation. “In the U.S., the government is spending a lot of money it doesn’t have on stimulus, pork barrel projects, TARP/TALF rescue, etc.. That can’t be good. They must be either printing or borrowing money to do this. Interest rates on government bonds and inflation have to be going up in the future.” Two things fly in the face of this thinking. The 30 year Treasury had yields of less than 3% in January of 2009 (I would argue this was a flight to safety from other investments). During the Great Depression, a dollar in 1939 was worth a lot more than a dollar in 1928 (see chart) and bond rates fell from 1928 to 1939.

I generally don’t like to compare the current situation with the Great Depression but there are some parallels:

Someone on Bloomberg TV today said we have moved from an apocalyptically bearish to a reluctantly bullish market. That is probably a fair statement for the the moment. Someone else a couple of weeks ago said we have gone from a death spiral in the economy to a period of slow rate of economic decline. Then someone else said, the economy is not going up, but it is going down at sufficiently slower rate that it almost feels like up.

Analyst predictions for earnings and valuation multiples are split. Uncertainties as to government policy with respect to banks and auto companies remain high. We continue to be in a government policy driven markets situation.

The recent sharp declines in 10-year U.S. Treasury yields have caused Scotia Capital to reiterate its move into corporate bonds.

Vincent Delisle, a strategist at Scotia Capital, said Scotia began to lower its holdings in long-term government bonds at the end of 2008 in favour of a move into corporate bonds.

Ben Bernanke says the United States has plunged into a deflationary depression.

Really, that's what his Fed announcement from last week made plain. His deflation-defying policies have clearly failed to date on Bernanke's own metrics. Because he's now moved to applying the cure instead.