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The Treasury market is trading to the quietest of bids this morning as investors digest the issues affecting the bond market. Quite frankly, there are only a few to digest. Not in any order, but we are evaluating, 1) inflation 2) economic growth 3) a struggling Congress, 4) oil prices, and any potential geopolitical risks that may exist. The yield curve continues to flatten, tightening from 105 basis points on May 15th to a low of 79 basis points on June 14th. We have “surged” two basis points in the last week, but you get the story. Typically this disconnect between where short rates are and where long rates are has to do with the idea that economic growth is about to wane. I am not so sure that is the case, in fact the expectation is for the U.S. economy to continue its “fits and starts” until we see real tax reform and deregulation. But the real issue, the one that has plagued the Fed all along, is inflation. Wages and prices aren’t moving all that much even though we have seen millions of jobs being created and, at times, very solid economic growth. The Fed keeps saying inflation is coming and the bond market continues to trade higher in price and lower in yield with almost the opposite viewpoint. Something will give, as it always does, but this lack of volatility in the fixed income market makes watching paint dry seem exciting. Jobless Claims for the week ending June 17th rose by 3,000, but remains pretty low at 241,000. Today the Fed posts the results of the latest stress tests for a number of large banks. There may be a few morsels of interest but the largest majority of these financial institutions will show up in really good shape. That leaves us with a 30-year TIPS auction and the news that the Treasury Secretary is getting married. There remains a very active long-end trade in Treasuries due to the expectation that this drop in inflation is much more than that.

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