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Treasuries fell yesterday on speculation interest rates may rise at least twice this year.  As noted many times, there is a massive disconnect as to what the market thinks the direction of monetary policy will be in 2016 and the direction the Federal Reserve is suggesting.

I believe this complacency and lack of conviction of potential fed policy has caused Treasuries to become massively overvalued, perhaps worse than the NASDAQ was in 2000 when that indexed was priced PWE  (priced beyond wildest expectations).

A major reason for this complacency is the years of missed Fed forecasts.  Almost five years to the date, many including the Federal Reserve, thought the economy was on the verge of “escape velocity,” the pivotal transitional point of sustaining economic growth.  All—including me—have been wrong.

Will 2016 finally be the year “escape velocity” be achieved?  I think yes but I have held this view for five years, a view that is almost synonymous to that of the Federal Reserve.

I can write volumes as to why this transitional point has not yet been achieved by will only state with Treasury yields so low, a 100 basis points increase will decimate long dated Treasury prices, a decimation few I believe have could occur.

What will happen today?  Will selling in interest sensitive investments continue as the markets have made a dramatic shift in monetary expectations where one in four are now expecting an interest rate hike in June following the release of Minutes from the April Fed Meeting.

Wow!  Talk about a dramatic change in sentiment.  Wednesday morning the market was suggesting a 4% chance.  At the time of this writing, the odds have surged to 32%.

Last night the foreign markets were down. London was down 1.28%, Paris down 0.70% and Frankfurt down 0.99%.  China was up 0.56%,  Japan up 0.01% and Hang Sang down 0.67%.

The Dow should open nominally lower on monetary policy concerns.  Futures were lower earlier in the morning but have since rebounded as Wal-Mart crushed earnings and this Dow component is now up about 10%.  Speaking of 10%, Wal-Mart is 10% of total non-automotive retail sales.  What are these earnings suggesting about the health of the economy?  Oil is down as the dollar is rallying.

The 10-year is off 5/32 to yield 1.88%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.