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Yesterday the Treasury market seemingly registered another wave of fear over upcoming supply flows. Better than expected data flow yesterday and a slight recovery in the US equity markets just ahead of mid session yesterday also provided a back drop for the slide to the lowest levels since March 4th in the June bond contract. The trade generally expects the second quarter refunding to be around $75 billion and a figure higher than that amount would not be surprising. In the face of a minor near term recovery in equity prices and or even the slightest lack of resolve for the 7 Year Note auction (of $26 billion) today could be just the ticket to send June Bonds down to the lowest level of the last six months. Therefore, initial support in the June bonds this morning is seen at the February 27th low of 123-04, with similar support in the Notes seen at 121-13.
We are not sure if the 1st quarter GDP reading will be that important, as that data is somewhat old now and the Treasury market is clearly looking forward. Surprisingly the Treasury market hasn’t seen the slightest sustained lift off the prospect of renewed and even more severe slowing off the swine flu situation. Perhaps the trade thinks that severe and sustained slowing off the swine flu situation would simply prompt the US government to borrow more and spend more. In the short term, the market will also be presented with an FOMC statement later today, but unless the swine flu situation is thought to become a major drag on the economy ahead, we doubt that the FOMC will bring out anything surprising. However, the Fed certainly sees the swine flu incident as a threat to the economy and some response from the Fed could be forth coming today, but the question is what type of move the Fed would try to implement especially given that they have already pulled out most of the well known “stops”. Economic information from the Euro zone overnight appears to be applying a slight bit of fresh pressure to Treasuries this morning, as the Euro zone business climate actually improved for the first time in 11 months. However, because Euro zone Confidence levels are still within relative proximity to record lows, the outlook for the global economy remains precarious. In the US a number of regional Fed readings have also shown improvement from prior readings but those numbers also remain deep in negative territory and that also shows the global economy is still very suspect.
With refunding news, an auction, an FOMC statement and swirling swine flu news, we suspect that volatility levels will remain high in the Treasury markets today. Given the negative bias in bond prices in the face of the swine flu development, it is clear that the bears retain control and even the slightest sign that swine flu is coming under control could be just the ticket to send both bonds and notes down to even lower trading ranges ahead. Near term critical resistance in June bonds today is seen at 123-26, with similar resistance in June notes today seen at 121-23.
