trying to get my thoughts straight

I sold FXY today because bonds have dropped the most in three years. The dramatic fall of bonds has propped up the dollar.

The yield curve is now no longer inverted after the 10-yr yield rose to 5.13% from 4.97% yesterday, and for the third straight day. This comes together with news this week of Syria breaking it's dollar peg and speculation that the U. A. E. will be next. In addition, Australia's economy is stronger than expected, and the bank of New Zealand roiled the markets with a surprise rate hike to 8%.

I must admit that the decline in bonds (and corresponding rise in yields) caught me by surprise. I think that bonds fell for a combination of reasons. First, there is the Bernanke's assault on the idea that the Fed may lower rates. Second is the trend of countries (first Kuwait, now Syria) breaking their peg to the dollar. In addition, we have strong economic growth in Australia, and an upward bias to rates in Europe. Finally, there was yesterday's surprise rate increase in New Zealand.

The market has finally realized that global growth is forcing rates higher. The question is, how much more do bonds have to go? My stocks have gotten killed the past couple of days. Clearly, the attempt of FCB's to keep rates in the US low is not working. Is this the turning point from credit expansion to credit contraction? If it is, I would not want to be long the stock market.

Well, I don't see much to do tomorrow except to see whether rates keep rising. If so, it could quickly reach the point where buyout deals don't make sense. On the other hand, if rates subside, and FCB's step in to provide liquidity, the market will take off again.

For me, it's impossible to tell whether the speculative rush to sell bonds will trump nonspeculative bond buying. Hindsight is 20/20. Because we have processes working against each other, it is impossible which is more likely to prevail because there's no way of knowing the quantities each side is working with.

I think that today's steepening of the yield curve actually might make it more likely that rates will be dropped. Higher rates could make the housing market much worse, hurt consumer spending, and whack the stock market.

Well, time to look over my portfolio and see what I want to keep. Getting my thoughts into words has helped a little, but I'll have to come back to reread this after some more thought later today.