From a fundamental perspective...the past several months shows US interest rates to have risen very sharply as US economic data continues to show strength - from employment to manufacturing to retail sales et al. Moreover, higher energy prices led by gasoline and crude oil have further thrown a "negative light" upon interest rates; which in combination have caused sentiment to become decidedly negative. In fact, the 10-year note futures are now showing their largest short interest in quite some time...perhaps ever.
Consequently, this argues for a "catalyst" or "watershed event" to turn yields lower - and in fact Chairman Greenspan's renomination hearing commentary before the Senate sent bond yields plummeting. To us, this doesn't argue as to a watershed event; however, the "outside reversal week" lower price pattern in which yields formed last week argue for lower yields in the intermediate-term. This very pattern developed at the lows...and now at the highs.
Therefore, we are willing to venture into the long side of the bond market, for if short covering develops before the June 29-30 FOMC meeting as we anticipate...then the proper position is to be long either the bond futures or the Lehman 20+yr. Bond Fund (NYSE: TLT). That said...we are doing exactly...and looking to add more as prices move higher...doing more of what is working for you.
