Fixed Income moved from mean reversion into momentum ==>> Higher US yield & higher US dollar?

Off to London shortly, but wanted to update you on break in US yields which is causing some small "issues" for QE trade. The "confirmation" on the move higher in yields seems to be this WSJ piece leaked in Asia this morning:

The implications?

- Political leak lowering expectations into QE - still going to be more than this article states
- Higher US yield
- Higher US Dollar - probably....

Short FIXED INCOME, long US Dollar vs JPY & EUR..... short S&P (as always) otherwise NEUTRAL on all others assets, high cash reserves, and in "hit-and-run" mode day-by-day....

Good Luck



Fed Gears Up For Stimulus
2010-10-26 23:41:19.607 GMT



 By Jon Hilsenrath and Jonathan Cheng

 The Federal Reserve is close to embarking on another round of monetary
stimulus next week, against the backdrop of a weak economy and low inflation --
and despite doubts about the wisdom and efficacy of the policy among economists
and some of the Fed's own decision makers.

 The central bank is likely to unveil a program of U.S. Treasury bond
purchases worth a few hundred billion dollars over several months, a measured
approach in contrast to purchases of nearly $2 trillion it unveiled during the
financial crisis. The announcement is expected to be made at the conclusion of
a two-day meeting of its policy-making committee next Wednesday.

 The Fed's aim is to drive up the prices of long-term bonds, which in turn
would push down long-term interest rates. It hopes that would spur more
investment and spending and liven up the recovery. But officials want to avoid
the "shock and awe" style used during the crisis in favor of an approach that
allows them to adjust their policy, and possibly add to their purchases, over
time as the recovery unfolds.

 Fed Chairman Ben Bernanke's push to restart the bond-buying program -- a form
of monetary stimulus known as quantitative easing -- has been greeted with deep
skepticism among some of his colleagues.

 In some of his strongest words yet, Thomas Hoenig, president of the Federal
Reserve Bank of Kansas City, said Monday that more expansive monetary policy
was a "bargain with the devil."

 In the next few months, internal opposition to Mr. Bernanke's approach could
intensify as presidents of three regional Fed banks who have expressed
skepticism about the plan -- Narayana Kocherlakota of Minneapolis, Richard
Fisher of  Dallas and Charles Plosser of Philadelphia -- take voting positions
on the Fed's policy-making body. There are 12 regional Fed banks, and five
voting seats on the Federal Open Market Committee rotate among them every year,
with New York always keeping one.

 Investors already expect Fed action. Stock prices have rallied since Mr.
Bernanke broached the idea of bond buying in late August. But investors and
analysts are divided on whether the gambit will work.

 In normal times, the Fed reduces short-term interest rates when it wants to
spur growth. But the central bank already cut short-term rates to near zero in
2008, so it is turning to an unconventional measure.

 Some Fed officials argue the economy is going through long-term changes that
the central bank can't rush, and worry a large bond-buying program might only
stoke future inflation or a new asset bubble.

 But the view likely to prevail at the Nov. 2-3 meeting is that the economy is
falling short on two fronts: Unemployment, at 9.6%, means the Fed is falling
short of its legal mandate to maximize employment. Inflation, which is running
a bit above 1% so far this year, is below the Fed's informal objective of about
2%, and runs the risk of falling even lower. With so much unused capacity and
spare labor, many officials contend, the Fed is unlikely to stoke a worrisome
amount of inflation.

 Though details remain to be being sorted out internally, the broad outlines
have taken shape.

 Unlike in March 2009, when the Fed laid out a program to buy $1.75 trillion
worth of Treasury and mortgage bonds over six to nine months, officials this
time want flexibility as they assess if the program is working.

 Mr. Bernanke has used the analogy of a golfer with a new putter: Unsure how
it will work, he finds best strategy is to tap lightly at first and keep
tapping until the golfer figures out how best to use the putter.

 The Fed could leave open the possibility of more purchases in the future,
particularly if inflation is projected to remain below 2% and the unemployment
outlook remains high, which is currently the expectation of many officials. Or
it could halt the program if the economy or inflation surprisingly take off.

 Fed officials will update their forecasts for growth, unemployment and
inflation through 2013 at the upcoming meeting.

 Investors are on edge about how the Fed will proceed. On the one hand, the
Dow Jones Industrial Average has risen 12% since Mr. Bernanke began hinting
about buying more bonds two months ago, a welcome rise inside the Fed.

 But commodities prices are also soaring. That could portend more inflation
than the Fed wants. At the same time, the dollar has slid nearly 10% against
the euro; that could help U.S. exports, but it creates tensions with trading
partners.

 From nearly 4% in April, the yield on the 10-year Treasury note has already
tumbled to about 2.6%, in part because investors expect the Fed to be in the
market buying bonds. Mortgage rates, closely tied to the 10-year note yield,
have fallen to their lowest levels in more than four decades.

 A Wall Street Journal survey of private sector economists in early October
found that the Fed is expected to purchase about $250 billion of Treasury bonds
per quarter and continue until mid-2011.

 New York Fed president William Dudley put forward one key benchmark in a
speech earlier this month. He noted that $500 billion worth of purchases had
the same impact on the economy as a reduction of the federal funds rate by
one-half to three-quarters of a percentage point.

 In speeches this week, Mr. Dudley repeated he found the economy's weak state
"unacceptable" and said "further Fed action was likely to be warranted."

 The bond-buying program is likely to focus on Treasury bonds with maturities
mostly between 2-years and 10-years. The Fed could buy even longer-term bonds,
though some officials are reluctant to do that aggressively because it could
expose them to long-term losses without much added benefit.