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Fed Denies Recession No More: 10 Yr Yields could back up to 3.75% in Q2 08

 April 02, 2008 10:55 PM

`It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly,''  Bernankesaid in testimony to Congress's Joint Economic Committee today. In regards to the burial of Bear Stearns he also said he hopes he does not have to undertake a similar measure again.

This downward shift in expectations is a very important acknowledgment for the financial markets. Up until this point, top US officials were all about the "spin" forecast. Now we can get on with the reality of a recession.  (US Secretary Paulson and Bush of course remain in the spin camp ~ they just prefer being there). Two pricing models from Sept 10 087 and Nov 27 07 suggests when 10 yr yields back up, they back up between 42-46 bps. If the 10 yr yields back up 46 bps to 3.75% in April, this will dovetail nicely with the 4 month 78 day moving average in the fourth month of 2008.

The 4 month moving average has nicely contained any rise in yields since August 13 2007. At 3.75% the yield gap will be 150 bps above the 2.25% Fed Funds rate. It should prove very difficult for 10 year yields to rise any wider than 150 bps above the fed funds rate, unless both inflationary expectations and housing prices begin to rise during this recession.

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