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Treasury prices exploded in the wake of the Fed’s decision to buy $300 billion in long term Treasuries and a further $750 billion in US agency issues. Clearly the market was caught off guard given the historical reaction in prices, but with the bond market holding nearly 2/3rds of the spike up explosion, it would seem like prices are going to remain firm for the near term. While the Fed indicated they would concentrate on the shorter end of the “long term” market, the migration away from issuance of the 30 year Treasuries years ago, might mean that modest amounts of buying in the 30 year will serve to knock rates down, regardless of the relative amount of buying. While the buying is expected to be spread out over time there might not be a lot of initial interest in battling against the Fed in the short term. With the action from the Fed viewed as highly inflationary by a number of markets, we eventually expect a major bubble to be revealed in the Treasury market and that could make the recovery rally yesterday a historical opportunity. However, if major central banks are going to utilize historic powers that could interject massive volatility into prices for the near term. Since it could take a while for the Fed’s quantitative easing efforts to settle into prices, those looking to get short might be well advised to wait until the news is fully understood. However, traders should consider the purchase of a put ratio spread in the September options, as that type of position will to a degree weather temporary follow through on the upside. While the market will see initial claims, Conference Board leaders and the Philly Fed survey this morning, we doubt that the Fed’s action yesterday is going to make the Treasury market significantly more responsive to scheduled data flow. On the other hand, given the threat lodged against the shorts in the prior trading session, it is possible that the market will initially benefit from weak US data flow and therefore we suspect that June bonds will probably see a pulse above the 130-00 level today, with additional resistance seen off another key level up at 130-11.
In the note market, the trade seems to have held a somewhat larger portion of the historic spike up in prices overnight and that might be the result of expectations that the Fed will ultimately buy a larger portion of Notes than bonds. Like the bonds, we suspect that the June Notes will see a positive reaction to the scheduled data flow today with initial resistance seen up at 125-12 and then again up at 125-18.
