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The fact that the US government stepped in to save Citigroup, probably rekindled the fear of US government borrowing again, especially since that bailout raised the bar on the biggest US bank bailout outlay. With the market also seeing talk about the prospect of continued tax relief from the incoming President, the Treasury market sees a number of issues that collide with the recent round of new highs in Bonds and Notes. In fact, with the market talking up the prospect that OBama might delay revoking income tax windfalls to high incomes, the global market could be concerned about the US budget deficit expanding even more rapidly. With the Chicago Fed National Activity Index and Existing Home sales figures due out this morning and an extremely active US economic report slate due out before the US holiday later in the week, the outlook for the economy should get plenty of coverage.
Clearly the market is expecting further slowing evidence with some expectations starting to project the US unemployment rate to eventually rise above 9%. While we suspect that Treasury prices are initially lower today because of the slight bounce in the equity markets today, a press report overnight suggesting that the Citigroup move will simply discourage the equity market from imploding, really highlights the macro economic doom and gloom present in the headlines. In order for Treasuries to gain some upside traction the market will have to tamp down the fear of excess borrowing again and that hasn’t been that easy in the past two months. Therefore, the “fear of borrowing and the fear of excess supply” looks to keep the bull camp off balance. In fact, after the explosion in prices last week and the massive gains in Treasury prices for the month of November, these markets needed some corrective balancing. However, the November 18th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 81,236 contracts, with the Non-reportable position net short 57,219 contracts and that left the “combined” spec and fund position net short 138,455 contracts in Bonds. With the Bond market managing a rather impressive 9 1/2 point rally in the wake of the COT report mark off, we suspect that a large portion of the net spec short positioning in bonds was alleviated.
In the end, it is clear that the Treasury bond market is hardly outright spec long yet and that could ultimately help bonds continue to out perform Notes in the short term. In fact, with the 10 Year Treasury Notes showing a “combined” spec and fund position that was net long 30,122 contracts and the Note market managing a 2 point rally in the wake of the COT report, that probably inflated the net spec long positioning in Notes somewhat further. With the Note chart looking somewhat vulnerable at the start of the new week it will be very important for the market to show some positive reaction to the scheduled US numbers this morning, as the failure to respond with a rally could signal that the market remains in a weakened posture.
Critical support in the December Notes is seen at 119-19, especially through the scheduled data flow today. Critical support in the December bonds is seen at 125-25 and then again down at 125-14. In the near term, we think Treasuries have lost their bullish buzz and the fear of supply looks to keep prices off balance. In order to rally, severe slowing needs to be seen without the presence of serious financial market uncertainty and that could be difficult to engineer today.
