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It was clear from yesterday’s market action that without the constant support of a safe haven bid, Treasuries are likely to be weighed down by the sheer amount of new debt supply needed to be auctioned. Yesterday’s grim economic news and warnings for a protracted and severe economic recession wasn’t enough for the Treasury market to hold on to early strength since it didn’t stir up fresh economic or financial sector anxiety in the equity markets. While Treasury market direction will continue to be highly influenced by the equity market, we continue to believe that the mountain of debt that the marketplace will need to absorb will ultimately drive Treasury yields up and prices down and that gains on safe haven rallies will provide selling opportunities.
It seems as if a measure of calm was restored to the equity markets yesterday after Fed Chairman Bernanke made assurances that the Fed didn’t need to nationalize US banks to keep them viable. Seeing the gold market continuing to sell off overnight and global equity markets higher also reflects a lower fear factor, and if improved sentiment can hold during the US session, it will likely end up weighing on Treasuries as the market’s focus shifts to the auctions today.
The Treasury will be selling $32 billion in 5-Yr Notes today, and we suspect there will be some concern over whether foreign demand for US debt will remain strong in light of the less than average foreign participation in the 2-Year Note auction yesterday.
In his speech last night, President Obama warned that even more government money will likely be needed to revive the economy. The bull camp case has also been undermined by Bernanke indicating the Fed wasn’t planning at this time to directly purchase longer dated Treasury debt. With the huge amount of supply that will need to be absorbed, we see little upside potential for the bond and note markets.
Today’s report on existing home sales may provide an early safe haven bid to Treasuries. Bernanke testimony to the House Financial Services Committee today has the potential to provide more of a calming effect on financial markets, and that would favor the bear camp in Treasuries.
Unless anxiety levels are revived and there is another steep fall in equity markets today, we suspect any early gains in Treasuries will likely be given up in a post auction trading. As a result, June Bonds look vulnerable to being pushed back to test support at the lower end of the consolidation range.
