Market Analysis

Yesterday we experienced significant selling pressure in bonds which increased during the day as investors digested the surprise portion of the deal reached in Washington to extend the tax cuts for all income earners. The surprise was the reduction of the payroll tax by 2%.   While economists like Mark Zandi with Moody's applaud the move, it puts the world on notice that while other countries are taking difficult measures to cut government spending, the spigot remains open in the US and the deficit will grow ever larger.  This, in conjunction with the Fed's QE2 program, is causing significant heartburn among the big buyers of US Treasury notes and mortgage backed securities for whom it is becoming increasingly difficult to justify current yields/rates of return knowing that there will be an onslaught of supply of new debt coming for several more years on top of the onslaught of existing debt that will need to be refinanced by the US Treasury.

This morning there is no let up in selling.  The 10 Yr US Treasury is now yielding 3.2%.