Last Friday, I was talking about an economist survey suggesting treasury yields were heading North. This is what I wrote in Huge Treasury Rally Underway: Where To From Here?

I am amazed by that survey. What the heck are those economists possibly thinking? Stranger things have happened I suppose, but that is an extremely poor bet. In fact, if jobs come in exceptionally week, 10 year yields could drop to 3.75 or so.

It would take a huge jobs number to cause a treasury selloff like that predicted by the economists survey. In addition, mortgage rates will soar should that happen.

It is always dangerous to make specific predictions in a specific timeframe but I am going to give it a shot. The line in blue is what I think the curve will look like if the next jobs report comes in weak.

Yield Curve As Of November 23 2007

click on chart for a crisper image

At Noon today the curve was essentially flat and I talked about that in LIBOR Rates Show Stress. I took another look at the curve near the close. Here it is. To make things line up visually I am putting it in blockquotes even though I am not quoting anything.

Yield Curve As Of November 26 2007

Compare the green line with the blue line above.

No, I did not expect this in a week let alone one trading day. However, we are where we are and if jobs are weak we could see 30 year yields below 4. I am not calling for that now, but I do expect it sometime next year.

One thing this highlights: Surprises are most often in the direction of the prevailing trend. In this case, the trend is towards lower yields. As an aside, anyone who thinks this action portends rising inflation expectations must be reading the Bizarro World playbook.

Mike Shedlock / Mish
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