The reflation trade got a big boost from Treasuries today as the latest auction brought yields of close to 4%, much higher than the pricing of the May 9th delayed auction when yields were about 3.19%. The ongoing run on oil didn’t help matters as crude futures rose to $71.83 a rise of 1.84% a new high for 2009. A safe yield of 4% brings competition to all markets and could choke off mortgage financing which is up to the 5.5% level for the most qualified buyers. Despite rising rates and weakness in the dollar the treasury auction continues to find buyers. Additional pressure on the dollar may come from an announcement by Russia and Brazil that they will buy $20B of IMF funds to diversify their currency exposure.
As the deficit grows to the $1.75 T up from last year’s $455B area expect more concern about plans to cut spending and reduce the deficit. So we have reached a juncture where the FED must show some restraint by raising rates and the Administration must show fiscal restraint or money will continue to flow into commodities, international markets with a a weaker dollar. Now that depression is averted global markets focus on government debt.
Our best trade was TBT up 40%+ YTD and 3.5% today. Traders should take profits on treasury shorts. Industrial and precious metal stocks remain hot with FCX up 166%, GDX up 34%, and PAAS up 49%. Silver beat gold by a factor of nearly 2X. NASDAQ is hot and real estate is in a funk. Energy and commodity stocks remain a play for the weak dollar and inflation. Corporate bonds sold off as well with PCN down 4.5%
Oil is looking a bit toppy as it is controlled by speculators and decoupled from economic fundamentals as oil prices are more sensitive to money coming from traders and investors.

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