The Institute for Supply Management has issued its reading for January non-manufacturing and the data is strong.  Very strong.  At 56.8, this is the best reading in almost a year.  Dow Jones was only calling for a reading of 53.1.

The business index was 59.5 versus 55.9 in December.  Employment showed the biggest gain to 57.4 from a prior December reading of 49.8 and prices rose only to 63.5 from 62.0 in December.  Even new order picked up to 59.4 from 54.6 in December.

The news this morning, particularly after the stellar jobs numbers, is really hurting longer-dated Treasury prices and driving yields higher.  The Fed Funds Futures are signaling a much quicker rate hike scenario than just a week ago.

The iShares Barclays 20 Year Treasury (NYSE: TLT) tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index and its price is down 2.3% at $116.39. The ProShares UltraShort Lehman 20+ (NYSE: TBT), which is double inverse the price action (intraday) is up a whopping 4.6% at $19.32 on the day.

JON C. OGG

• DJIA: 11,764.03 (-102.59; -0.86%)
• NASDAQ: 2,647.57 (-21.67; -0.81%)
• S&P500:    1,243.30 (-10.75; -0.86%)
• 30YR-T: 3.8050% (-0.114)
• 10YR-T: 2.5630% (-0.061)

Washington D.C. is responsible for this last wave of what probably locked the markets back into recession.  The debt and budget process actions were way too slow, were maddening to the public, and frankly gave businesses the last excuse needed to pull their hands off the buying buttons and hiring buttons.

The ProShares UltraShort 20+ Year Treasury (NYSE: TBT) hit a new 52-week low today, an extreme measure, as the Treasury yields challenged 3.80% on the 30-year and 2.50% on the 10-year.

ProShares UltraPro S&P500 (NYSE: UPRO), a 300% S&P 500 mover, has bounced a bit, but is still down over 2% at $65.55 after having traded under $64.00 briefly.  Direxion Daily Financial Bull 3X Shares (NYSE: FAS) has even briefly traded under $20.00 today before a recovery.

SPDR Gold Shares (NYSE: GLD) tracks the gold market and both hit a new high yet again. The SPDR Gold trust hit $162.86 today as gold was challenging $1,675.00 per ounce.  Even the iShares Silver Trust (NYSE: SLV) has risen back above the $40.00 death-trap line that has killed investors before.  Those shares are up 1.7% at $40.50 today.  These are feeling leveraged enough that we didn’t even dare use the leveraged metals ETFs.

Will an oversold bounce come?  It may be happening as this publishes.  The stock markets have now gone negative in 2011 and the losing streak will be nine consecutive days if today ends up in the red.  That would mark the longest losing streak in years and years for stocks.

The austerity measures will take out that much more from the economy.  The layoff waves have started all over again, GDP is anemic, Europe is trying to keep the PIIGS out of the slaughterhouse, Triple-A ratings are becoming mere token items, China and India keep slowing, austerity measures will drag, and on and on.

Now the big hope is that value buyers will step in or that a grossly oversold reading will bring on more buyers.  If you overlay the 2010 chart with the 2011 chart so far, this could end up being Financial Groundhog Day.

JON C. OGG

Stocks are higher but not with the fervor many might have hoped for with the DJIA only up 40 points and with the S&P 500 up about 3 points.  The move so far is having the following impact:

• Crude Oil is down $1.57 or 1.4% at $112.36 per barrel;
• Natural Gas is down $0.04 or almost down 0.9% at $4.72;
• Gold was down about $1.00 around $1,555.00 per ounce;
• Silver was where the biggest drop was with a $3.14 drop (-6.5%) at $45.46/oz.
• 10 Year T-Note 3.297% (up 0.03)
• 30-Year T-Bond 4.403% (effectively flat)

We are tracking the key exchange traded funds and exchange traded products on the news immediately after the open of the markets:

iShares Silver Trust (NYSE: SLV) down 6.6% at $43.82 and ETFS Physical Silver Shares (NYSE: SIVR) is down 9.2% at $43.50; SPDR Gold Shares (NYSE: GLD) is down 0.55% at $151.53. Silver had already been indicated down considerably before the Bin Laden news broke.

United States Oil (NYSE: USO) is down less than 0.4% at $44.99 and the nearly uncorrelated ETP for gas of the United States Natural Gas (NYSE: UNG) is down 0.1% at $12.05.

Whatever the currency impact was is slowing, at least as far as the PowerShares DB US Dollar Index Bullish (NYSE: UUP) is concerned, as it is now down 0.1% at $20.93.  The impact has also been muted in the anti-bond ETF of the ProShares UltraShort 20+ Year Treasury (NYSE: TBT).

Unfortunately there is only so much that one man’s death, even Osama Bin Laden, is worth.  The new fear is that this news will embolden many of the splint terror groups to increase their activities in the days, weeks, and months ahead.  This begs a question… Is the Bin Laden death what the Fed would call “transitory”?

JON C. OGG

It was just back in August when we sounded the alerts that 20 of 30 DJIA stocks had higher payouts than the 10-Year Treasury, and 8 of the 30 DJIA components had a higher yield than the 30-Year long bond. While there are still some out-yielding the 10-year Treasury and the Long Bond, the list has shrunk considerably.

We now have only 5 of the 30 DJIA components with a higher dividend yield than the 10-Year Treasury and we have only two yielding more than the long bond:

Kraft Foods Inc. (NYSE: KFT) at $31.41 yields roughly 3.70% with its $1.16 annualized payout. Merck & Co. Inc. (NYSE: MRK) at $36.66 yields roughly 4.20% with its $1.52 annualized payout.  Pfizer Inc. (NYSE: PFE) at $17.08 yields roughly 4.20% with its $0.72 annualized dividend but that is about to be higher at $0.80 per year and that new yield comes to almost 4.7%.

The only two which already yield more than the long bond are AT&T, Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ).  AT&T at $29.17 and the annualized $1.68 dividend comes to 5.7% for a dividend yield.  Verizon is at $34.58 and the $1.95 annualized payout comes to 5.6% for a dividend yield.

If longer-dated Treasury yields rise too much, they will become real competition for income-oriented investors.

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JON C. OGG

This morning is showing a 4.44% yield in the Treasury’s 30-Year long-bond.  While that yield hit 4.46% Friday and briefly appears to have challenged 4.50% earlier last week, we have to go back to the end of May to see the same yields on the CMT.

The Fed is said to be buying Treasuries out six to seven years on the curve, and this action is expected to start ahead of tomorrow’s FOMC meeting.  A headline late Friday noted about $110 billion was the indicated amount of Treasury purchase for the month ahead.  Whether that is the case or not is another matter.

ProShares UltraShort 20+ Year Treasury (NYSE: TBT) ETF is up 0.2% pre-market at $38.28 and its 52-week range is $29.77 to $51.21.  That one will see its price rise if Treasuries fall and their yields rise.  iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) is there for those who believe bond prices will rise.

JON C. OGG

Nothing illustrates the rise in yields and the drop in prices of long-dated Treasury maturities better than the highly volatile ProShares UltraShort 20+ Year Treasury (NYSE: TBT).  Keep in mind that this one has double-leverage and that it is inverse leverage.  At 10:50 its price is up another 1.2% at $37.94 but that was trading as low as under $35.00 back on November 30.  The high hit yesterday was $38.26 and that was the highest price seen since mid-November when shares hit $38.29 and $38.27.  You have to go back to the end of June to see other $38+ prices.

The ‘regular way trade’ on the 20+ year maturities that is a bet on rates falling and Treasury prices rising is the iShares Barclays 20+ Year Treasury Bond (NYSE: TLT).  It does not have the leverage and it is not inverse.  As rates rise and bond prices fall, the TLT loses value and that can be seen with a 0.8% drop today to $93.43.

A headline from the DJ broad-tape noted that the 10-Year Treasury yield of 3.267% was the highest yield in nearly six months.  We now show a 10-Year yield of 3.25%.  This may still be extremely low on historic terms, but this rate was down all the way at 2.48% back on November 4 and was at 2.76% as recently as November 23.  Just on Monday that had come back down to 2.94% after briefly going back above that whole number of the 3.00% hurdle.

The 30-Year Long Bond yield is now 4.40%.  This also may still be extremely low on historic terms, but this rate was down all the way at 4.04% back on November 4 and under 4.00%  on November 2.  The 30-Year yield was at 4.17% as recently as November 23.  Just on Monday that had come back down to 4.25%.

The big question is a post-QE2 question.  The Fed has signaled that it wants you to own risk-based assets because it won’t pay you much interest and that real rate of return may be far less if inflation kicks in.  When you see a 75-basis point rise in the rate of the 10-Year Treasury yields, the question is whether investors will decide to lock in their equity and commodity gains and settle for the safety of the Treasuries at a new benchmark.

So far this is the second day where we have seen a rapid drop in equity index values.  The DJIA peaked above 11,440 yesterday but it closed marginally in the red at 11,359.16. The DJIA is now in the red again down almost 15 points at 11,343.99 after having been up about 20 points earlier this morning.

Another bit of food for thought… If you have not refinanced your house to capture those lowest rates ever, you better see if you can qualify for that refinance.

JON C. OGG

There is one standout.  In the interview, CNBC’s Becky Quick and Joe Kernen asked many questions but the one that stood out the most was whether or not the U.S. was in a bond bubble after QE2 has started.  You know Buffett will leave himself wiggle room, but this was about as close to an overwhelming “YES” answer as the Oracle of Omaha will give:

• “I think short-term and long-term bonds are a very poor investment at the present time.”

He might not use the word “BUBBLE” but that is close enough.  The 10-Year Treasury yield is roughly 2.83% and the 30-Year Treasury’s Long Bond yields approximately 4.27% this morning.  So far we are seeing a slight gain in the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) as it is ‘double short’ the 20+ year Treasury Index.  It closed at $36.59 yesterday and is around $36.80 in early bird pre-market trading.  The iShares Barclays 20+ Year Treas Bond (NYSE: TLT) is indicated lower as well.  After a $96.14 close, it is indicated around $95.95, but it lacks the leverage and therefore lacks the volatility.

Buffett did note that he would rather be in stocks over bonds at the present time.  He also noted that the tax code should hit those making more harder.  He did note something a tad less damning on the bond bubble, and that is that the dilutive effect of QE2 won’t be huge.

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JON C. OGG

Much of the reactions seen in the last 10 days or so is in reaction and re-reactions to the endless efforts of QE2.  The new form of quantitative easing is not going well.  the intent with printing money was to “buy down intermediate and longer-dated Treasury yields.”  That has not been seen as the focus is on more short-term instruments.

The yield on the Treasury 30-Year long bond was under 3.70% at the end of September and it rose to 4.00% at the end of October.  Now it sits at 4.31%.  As far as the 10-Year Treasury Note, right before the end of September those yields were just under 2.50%.  Yields were higher above 2.60% at the end of October and now they sit above 2.80%.

Ben Bernanke and friends at the Federal Reserve wanted to reflate by getting closer to a target inflation rate of 2.0% rather than almost no price inflation at all.  Printing money and temporarily buying down intermediate and longer-term bond yields is something that will have many unintended consequences.  We’d say this about manufactured inflation… “Be careful what you wish for.  You will get it, and then some…”

As far as gold or influencing other commodities and influencing currencies and equities, this is sometimes true and sometimes false.  During the peak oilboom in 2008, gold was flirting with $1000 and was generally in a $800 to $100 range before and after the oil bubble burst.  At the time, oil was peaking around the $140 mark depending upon which markets were being eyed at the time.

JON C.  OGG

The move is an interesting one in theory, but if an individual were to pursue this strategy he or she would be laughed out of the park.  The move is rather simple: print up new cash and use the money to buy up shorter-term and intermediate-term Treasuries to keep rates low.  In short, dilute the currency and keep an artificial environment going with interest rates extremely low to near-zero to fight deflation.  The big issue is that printing money is inflationary while buying up Treasuries increases Uncle Sam’s balance sheet with securities that either mature or which will have to be sold (or used as collateral) down the road.

Is this currency manipulation?  The U.S. has been after China to loosen the peg on yuan against the dollar.  So far, China has committed only to a gradual devaluation of the currency into wider free-exchange bands.  That may take too long, and this move to print money to buy up assets may force China to unload currency in that peg.  Even if China holds on to its dollar horde, the impact may be the same.  Where this becomes a conundrum is that China would likely unload Treasury securities along the way and it would likely buy even fewer Treasuries as a percentage of its Central Bank assets ahead.  That would imply that China could keep selling and large portions of the money freshly printed just went to buy up the debt held by China.

The FOMC wants inflation a bit closer to its 2% implied target, far higher than what has been seen.  With the FOMC keeping short-term rates low at near-zero and with the Treasury increasing its balance sheet by buying Treasuries, this forces investors into risk-based assets.  If you can magically get inflation to 2% and short-term and intermediate-term Treasury rates are so low, what does that do to real returns on an inflation-adjusted basis?  Yep, negative real rates of return.

We already saw a TIPS inflation-adjusted security trade at a negative rate of return as investors seek safety yet get upside yield moves down the road if rates rise. As of today, The 5-year T-Note yields a whopping 1.18% and you have to go out to the 10-year T-Note to reach a yield of 2.58%.  That puts investors needing to invest about 7 to 9 years out the maturity schedule just to reach break-even on their real returns. If you consider Federal Income Tax, then investors have to go further than the 10-Year maturity just to reach a real after-tax zero-rate of return.

The move in the ETFs points more to the direction of where investor bets are heading more than it does address the issue over whether the U.S. is a currency manipulator. SPDR Gold Shares (NYSE: GLD) hit a 52-week and all-time high at $139.15, implying that above-$1,400 per ounce mark after fees.  The PowerShares DB Gold Double Long ETN (NYSE: DGP) also hit all-time highs of $43.23 earlier this morning and its gains are nearing a double from the lows of the last year.  A bet against long-dated Treasury maturities has been seen as a winner via the ProShares UltraShort 20+ Year Treasury (NYSE: TBT), which is an ETN that is double-short the 20+ Year Treasury index.  As longer yields are rising, it rose above $36.00 on Tuesday for the first time since August.

The last is the impact on the Direxion Daily Financial Bull 3X Shares (NYSE: FAS), with 300% of the intraday moves of the banks and financials in the Russell 2000.  Shares are still well above the QE2 announcement as a measure on the steepness of the yield curve, but the underlying shares in the index have not at all lived up to the broader market performance of late.

JON C. OGG

The SPDR Gold Trust (NYSE: GLD) is king of gold ETFs with millions of shares traded each day and with assets above $55 billion; its shares this morning are up 2.3% at $134.68.   The leveraged ETF is really moving: PowerShares DB Gold Double Long ETN (NYSE: DGP) is an exchange-traded note rather than a true asset trust with physical gold, but it is up 4.75% at $40.53.

Oil is higher again this morning and back above the $86.00 per barrel mark.  The three biggies here are the United States Oil (NYSE: USO) as the crude oil ETF, Oil Services HOLDRs (NYSE: OIH) as the oil and gas service companies ETF, and the ProShares Ultra Oil & Gas (NYSE: DIG) as the oil and gas drillers.  USO is up 1.5% at $37.29; OIH is up 2.2% at $124.80; and DIG is up almost 3% at $37.08.

Two days ago, the on-the-run 30-Year Treasury Bond had a yield of 3.93%.  After QE2′s announcement showed a table indicating long-bonds were barely a target of the FOMC, the yield rocketed up to 4.06%.  While that yield is a tad lower this morning from bond prices ticking up marginally, the ProShares UltraShort 20+ Year Treasury (NYSE: TBT) rose almost 4% yesterday to $34.66 because it is the double-short ETF against the Barclays Capital 20+ Year U.S. Treasury Bond Index.  Due to the bonds recovering marginally, its price is $34.46 this morning after the open.

What does very low yields on bonds mean with higher inflation?  The FOMC seems to have a 2% inflation target… You have to go out to the 10-Year T-Note to get above the 2.00% yield levels now.  The 5-Year T-Note yields barely 1%.  That means that all short-term and intermediate term Treasuries are trading at negative yields on a real return basis if you adjust for inflation.  Nice.

The economy is still holding up, and the fears of deflation seem overblown after commodities have risen as the dollar has weakened.  There is “the chicken versus the egg” argument over which came of course because the commodities rose and the dollar weakened in anticipation of QE2 effects.  Our take on manufactured inflation, “Be careful what you wish for…”

JON C. OGG