10 yr auction solid, why and what’s next?

The 10 yr auction was solid as the yield was 2-3 bps below the when issued and the bid to cover of 3.32 is above the 12 month average of 3.16 and the most since April ’10. There are two schools of thought with respect to the recent rise in energy prices. Those that think its inflationary, especially when combined with big jumps in a variety of other commodity prices and those that think its ultimately deflationary as the rise in oil eventually chokes the economy. I believe that we may get both but the latter after the former if commodity prices are sustained at current or higher levels. Thus for a period of time, stagflation will be the likely economic scenario. The danger with all this depends on how the Fed responds to elevated commodity prices, particularly energy. Do they back off and watch prices drop or do they print more to ‘save’ the economy from the threat of higher prices. Ben will likely print more. And we’ll get even higher prices.

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