Disaster in the Making?

BREAKING NEWS
US Treasury Notes and Bonds broke recent support last week and are hovering below new resistance levels, waiting for bad news to propel them toward new lows.

It would be very surprising if bonds can rally from here.

If bonds start to go lower, it will be a major sell-off, confirming the trend begun back in Janury of 2006 and confirmed in early March when notes broke major support.

Paterson's analysis suggests the 10 Year US Treasury note could lose 5 full points in the coming months, increasing yields 70 basis points or more to US note yields in excess of 6%.

Changes of this magnitude will provide an opportunity to add high yielding assets only if the liabilty structure is in place to support it.

The job of the Asset/Liability department is to forsee this kind of action at this stage in the interest rate cycle and prepare the institution for the event.

ANALYSIS
Asset/Liability managers must warn senior management of potentially rising long term rates, and prepare them for an extensive program of lengthening liability maturities, shortening asset maturities, and pricing new assets conservatively, There also must be plenty of juice in every deal. Do not underprice deals!

Also, those institutions with the ability to trade futures, options, and swaps should prepare emergency hedging operations.

As we said last week, the money numbers look good, as do gold prices, so it seems this is a real demand for long term liabilities pushing up long rates, not just an inflation play.

Institutions will see increased demand for long-term loans as borrowers switch out of adjustable loans.

PATERSON's HEDGING AND TRADING SEMINARS
- Hands-on personal training for A/L managers and their teams
- Training for senior management
- Board of Directors presentations

PATERSON'S 2Q 2006 CHARTBOOK
Paterson's latest Chartbook will take a detailed look at the fundamentals of this quarter and analyze the situation in the debt markets.

Look for the Chartbook in the second week of July.

See www.paterson.com for details.

Jim Klein
Monday morning, waiting for the show to begin.