just wanted to point out that if you were on itulip, you were reading about the coming "reverse conundrum" a full year and a half ago. i wrote about it in oct, 2007:

i know that historically when the economy slows and the fed cuts short rates, long rates have followed. however, i think we are likely to see a "reverse conundrum." you recall that greenspan labelled as "a conundrum" the fact that long rates stayed low even as the fed hiked short rates. my own reading of this is that long rates were held down by the recycling of the trade deficit into treasuries. higher short rates tended to support the dollar. the dollar index slowly declined, but that index is 50% euro, and the dollar held up much better against the yen and yuan, the currencies of the main dollar recyclers. at the same time the yen carry trade remained profitable, and could be made even more profitable by creeping out a bit on yield curve. this latter trade remained profitable as long as longer dated instruments didn't sell off, i.e. as long as the conundrum persisted. so the conundrum had momentum - as long as it persisted, it encouraged a duration carry trade which tended to maintain the conundrum. as u.s. consumption slows, so will imports. this is a double whammy: foreign exporters will not have so many dollars to recycle, as the u.s. market itself becomes less attractive and less worth pursuing via nation state level vendor financing. during the recent credit market scare the yield curve steepened sharply, via short rates dropping. long rates didn't drop, and even rose a bit.

so in the "gloom-and-doom scenario," when the fed drops rates to 1.5% on fed funds, what will the dollar do? unless there is a globally coordinated rate drop, the dollar has to drop sharply. of course, the boj can't join the party even if there is such coordination- they can't drop below zero. so there is market turmoil, equities are postulated [by byrne] to drop about 20%, the yen carry trade looks a lot less attractive, and - in this recession scenario - both the boj and pboc have many fewer dollars to recycle. but this is a recession scenario! what happens to the federal deficit? borrowing needs increase even as fewer dollars are need to support a shrinking trade deficit. i think all this adds up to a reverse conundrum: long rates will hold or even rise as the fed drops the fed-funds rate sharply. so if you want to hedge the "gloom-and-doom" scenario, don't do it with long bonds. just hold cash or perhaps hold zeros with a duration no longer than about 5 years.


http://www.itulip.com/forums/showthr...erse+conundrum

see also the thread "why such a leak" http://www.itulip.com/forums/showthread.php?t=10192