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The rise in yields is mirrored by falls/bounce in the stock market. At the moment, there are big sellers in bonds. My guess is China, who else can sell that much that any Fed intervention doesn’t even register. We have seen the spike in SHIBOR rates, China is having a liquidity crisis, selling what you can to raise cash makes perfect sense.

The second problem that it will create resides in the swap markets, where fixed interest is swapped for floating interest. Banks usually have big exposures to this trade. Watch the banks.

Here is the thing. Although Bernanke obviously spoke somewhat out of turn away from policy, that reduction has not occurred yet. The Fed will still be pumping $85 billion/month into the market, yet that $85 billion is being swamped by selling in the various markets. At the same time Bernanke spoke, or even a day before, the China story came to the fore. China in a liquidity crisis is a real trigger, Bernanke, just an excuse.

Being market neutral I am sanguine and profitable.

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