Treasury Refinancing in August

On August 2, 2006 the US Treasury will announce the size of the auction for 3, 10, and 30 year securities.

This event will give the markets a good idea about the demand for long-term debt.

In the current situation, it's most likely prices will fall prior to the auctions, and rise afterward, as Wall Street sells these securities to the public. This is the standard scenario in a bear market.

The size of the fall in prices will tell us what kind of orders the Primary Dealers have for this issue. Small decline means many orders.

However, if after the auction prices fall, it will signal the next stage in the bear market, begun in March of 2006, and an unwillingness by pension funds, insurance companies, and mutual funds to take on these securities in this bearish environment.

WARNING!
Recent analysis of money data for the past four years reveals a puzzle.

Money is not growing at the rate one would expect in a bear market. Neither the monetary base, MZM, M1, nor M2 are growing fast enough to generate inflation.

Something else is going on here, and it pays to be prudent.

TACTICS
Do not extend liability maturities past two years.

STRATEGY
Keep the book matched, and keep adding to overnight funds for the near future.

Fed Funds will continue to stay high for the next year - at least - to control inflationary expectations.

Keep an eye on gold prices. They will tell A/L managers if the Fed will continue to raise rates.