Bond Market

10 yr Treas: 4.46%
30 yr Treas: 4.66%

As we near 2006, cyclical conditions for the bond market are
both negative and volatile. In addition there remains a good sized
coterie of bond players trying to handicap an economic slowdown
and presumed deceleration of inflation pressure. I conclude the
market is in a mild cyclical upturn in yields which may also feature
more occasional spikes both up and down in yield levels.

That conclusion above was brief enough, but one could easily write
on and on about the many "ifs" and nuances and shadings that could
be added to fully flesh out an intriguing picture. I will content
myself with just a few brief remarks.

The markets are neither overbought nor oversold.

Bullish sentiment, as measured by Market Vane, is still positive
at around 60%, but is hardly excessive. the best buying opportunities
come along when this gauge is down around 30%.

There is much speculation that the yield curve could invert. An inversion
would carry substantial forecasting weight if it reflected tightening
credit conditions. But credit conditions are still easy -- there is no
liquidity squeeze.

There is also intense speculation about when the Fed will end its firming
up of the FFR%. If that happens to be, say 4.75%, it could well turn out
that the Fed may maintain that rate for quite some time, in which case
players will gradually realize they may as well shorten maturities.

Looking longer term, the great bull market in bonds is technically still
intact as yield remains in a downtrend. There is an extensive base building
under the downtrend which could be signaling that the bull is coming to
and end, but it is still too early to conclude same. For example, the
case for an end to the bull would be more compelling if the long Treasury
yield takes out 5.00% and then 5.25% this year. We've a ways to go before
we come to those bridges.