The classic and most watched measure of yield curve inversion (the 2 year T higher than the 10 year T) occurred this week for the first time since 2005. The 10 year was at 1.623%, the 2 year at 1.634%. Worldwide stock markets plummeted and investors rushed into bonds, sending yields lower and actually bringing the 10 year slightly above the 2 year as of tonight. The 10 year T dropped to 1.58% as of today (note this is only 22 bps above it’s all time low). Markets seem to be painting central banks into a corner – forcing further rate cuts.  The expectation that the Fed will cut 0.25% at its September meeting is now being superseded by thoughts of a 0.50% cut or a “surprise” cut before the next meeting. Interestingly, no one seems to be concerned that CPI posted its strongest 2 month gain since early 2006. This inflationary news should have sent bond bulls running for the exits and dampening Fed rate cut expectations. But scenes of social unrest in Hong Kong (a critical bond trading city) and Argentina are fueling bond rallies in a very “risk off” market. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners