This has caused many in the media and on Wall Street to PUBLICLY speculate on whether or not the "Bond" market, meaning US treasuries in this case, is in a "bubble" and sending yields irrationally low as a result.

This speculation is being driven by the fact that their almost universally publicly proffered view that Treasury yields would increase dramatically this year has been absolutely wrong. Compounding this is the fact the exact opposite has occurred.

Rather than admit that there is a problem with their fundamental economic analysis and rationale the conclusion now being proffered is that the treasury market is in a bubble. By extension we are all supposed to then assume, as Dr. Greenspan has stated about equities, that bubbles are irrational and can not, therefore, be anticipated.

In other words we are supposed to believe that it's not their analysis, predictions, rationale and conclusions that are wrong but that the markets are wrong. And that is supposed to relieve them of their responsibility. Nobody can read tea leaves, etc. and gosh everyone thought yields would increase too, so don't blame me.

Uh Huh.

Now, before going further I ask you to consider this: Who are the buyers of these treasuries sending yields down this year?

The problem with this current rationale of don't blame me is :

• We discussed the prospects and probabilities for falling yields right here on several occasions in painful and repeated detail. To the point that many of you have requested that I move on to something else.



• The reason I have not let up on this is because I will not allow for saving face. This is not simply a universal mistake. There are diabolical ramifications to this that you must understand. Should you choose not to is up to you.



• The pundits and analysts whom have been predicting higher yields have been doing so from their perch at the dominant wall street firms they represent.

Who are the buyers?

Falling yields are indicative of buying of Treasuries. The largest private US based treasury traders and holders come from within the financial sector; banking, insurance, and investment banking.

Anecdotally we can conclude that the firms whose representatives are PUBLICLY predicting rising treasury yields and increasing economic activity are also the firms PRIVATELY buying US Treasuries for their own portfolios.

I don't need to see empirical evidence of this. I can easily draw that anecdotal conclusion because there is no way retail buying can account for the rapid and deep reductions in yields this year. That can only be accomplished by large institutional buying, period.

Why then is there this mismatch?

The yield on the 10-year Treasury has fallen almost 50 basis points from the high it posted with a month of the last FED funds rate reduction of 50 basis points last October. So, within 3 months the 10-year Treasury yield has fallen by 50 basis points while simultaneously to this occurring the representatives of the buyers have been telling us to sell treasuries.

When they predict rising Treasury yields what they are really doing is telling you to sell treasuries and by connection then to buy stocks and corporate bonds.

So they are telling you sell Treasuries, while they are buying them and they are telling you to buy stocks and corporate bonds while they are selling them.

And when you get screwed on both sides of the transaction its because there is (1) an irrational "bubble" in Treasuries, and (2) irrational pessimism in stocks. But, it is certainly not that they are wrong or worse yet that they may be moving to protect their own asset base at your expense. Oh No, heaven forbid, our economists, pundits, and analysts would never put the interest of the firms signing their paychecks ahead of the interest of their own clients or the public trust.

Of course not, it must be a bubble.

Are you getting the picture?

This is the do as I say not as I do scenario playing out right now.

As these large financial firms buy up the Treasuries while simultaneously telling you there will be a rebound and that you need to sell Treasuries and buy stocks and commercial bonds ahead of it occurring what they are actually doing is telling you to put your money at risk while they move to protect theirs.

In other words they are cheerleading the economy while moving to protect their own asset base.

If they can get the retail investor to buy stocks and corporate bonds and sell Treasuries they can be there as the counter party to both transactions.

They will sell you the stocks and bonds and buy your treasuries.

In other words these institutions would like to see an economic rebound and will cheerlead a coming rebound right along with the monetary and fiscal authorities, BUT, they are not willing to bet on the rebound occurring with THEIR money.

If they can convince the retail investor and consumer to be the impetus of an economic rebound that's great, but they aren't willing to put their money where their mouth is.

This is not pessimism or cynicism. It is merely the most probable anecdotal conclusion that may drawn from the empirical evidence.

February 27, 2003

Roger Arnold is the President of www.myhomelender.com , host of the nationally syndicated talk show "The Roger Arnold Show" and publisher of "Daily Observations" Roger can be reached at roger@myhomelender.com