March 28, 2005

What impact the fast and rapid increase in the long bond yields will have on the market will depend on how much is anticipated. One thing is clear, long bonds will take a beating at the time and whether the stocks do or do not depends on how much of the snap back is anticipated and its effect on the real economy. Hedge funds who do not anticipate it will be caught in the crossfire and suffer significant losses. If the Fed responds as we expect there will be no problems with capital adequacy issues and the financial markets will not be impacted in a significant way by the hedge funds failure. Fixed income should under perform equities during this time.

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