As the chart shows, bond prices have fallen through the 114 level on the CBOT and look likely to head lower as fears of inflation power sellers of long term securities.
At the same time, corporate securities have continued to climb in yield adding 500 basis points since the beginning of the year.
Inflation Tactics
The problem at this stage is inflationary expectations. The falling dollar combined with aggressive policies by the Fed concerns bond holders who are shedding long-term securities in fear of a long term commitments.
In our view, the Fed has not been particularly inflationary, as it has sold Treasuries to compensate for the extension of credit to banks and primary dealers. But, as long as inflationary pressures continue, and the business cycle expands, prudence requires reducing long-term assets and lengthening the maturity of liabilities.
Tactics
Continue money market arbitrage, shorten the maturity of assets and lengthen the maturity of liabilities.
Strategy
Senior management must aggressively prepare for new business as credit conditions improve. Prudent credit analysis can add high quality assets to the portfolio at bargain prices.
The risk is that lenders will not have the resources available to take advantage of these opportunities.
The board must understand the situation we are in, and must be appraised of the changes underway at this juncture. The economy has emerged from a potential catastrophe in better shape than any of us imagined.
It's time to take some risk, and prepare for the coming boom in lending opportunities.
