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The Treasury market did see a somewhat impressive recovery in the prior trading session, but as has been the case recently, the market was unable to hold that run up. Surprisingly the market was lifted in the face of a sharp upward extension in the equity markets, but even more surprising is the fact that the market also seemed to rise in the aftermath of the last wave of a three leg auction of US Treasuries. Apparently part of the initial setback in prices this morning, is the result of a strange comment from the Chinese Premier, who asked the US to take special care of the Chinese assets held in the US. Understandably the Chinese should express concerns, especially since the Chinese have lent the US massive sums of money by purchasing US Treasury instruments and the Congress and the new Administration are apparently comfortable with borrowing record new sums regardless of the priority of those needs. Seeing the Chinese give off the slightest hint of pulling back from US Treasuries would make future auctions of US Treasuries very suspect and that in turn could cause a rout in Treasury prices the likes of which have never been seen before.
Given the recent spate of earmarks flowing from Washington, the legislators and the President don’t have the slightest fear that their borrowing spree could be curtailed by forces outside of the country. In fact, the President, after railing on the earmark issue early in the week, went ahead and signed the latest pork barrel laden budget and in the process it seems that business as usual in Washington continues. In the end, it is no wonder that Treasuries can’t mount and sustain rallies because the market alternatively fears exploding supply or massive “reflation”. While the US Trade balance figures aren’t usually a major issue for Treasury prices, the failure to see a narrowing of the deficit today might be seen as a minor negative to Treasuries, especially after talk early in the week that some foreign central banks might be poised to force their exchange rates down in an effort to give those countries an advantage in international trade. We suspect that June Bonds are poised to track back toward the middle of the last two months trading range, which might be located around the 125-15 level, with the middle of the Note range seen down at 121-00. While some bulls hoped that continued gains in stocks would suggest that market conditions are attempting to return to a more normal environment, even that doesn’t seem to help Treasury prices. Recently, Treasuries were pressured by ideas that sustained and severe slowing would simply result in an unrelenting additive Treasury supply flow, but apparently seeing three or four days of strength in the equity markets doesn’t mean that Treasury supply will be reduced! In short, the bulls have the edge and won’t be discouraged easily.
