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Despite seeing fairly solid demand for the second leg of a three leg auction, US Treasuries clearly rejected the fleeting attempt to rally early in the prior trading session. Through the overnight action the markets have actually managed a distinct downside breakout on the charts, with the June bonds seemingly on their way to filling a gap down at 119-24. While the private monthly jobs surveys haven’t had a great track record in replicating the US government jobs figures, the trade certainly looks to those readings for direction. With the jobs outlook seemingly not as bad as initial expectations and some other scheduled readings this week pointing to gradual improvement, it is not surprising to see prices skid. Today the market will be presented with initial and ongoing claims and it is possible those figures could temporarily countervail or dull the downside tilt. On the other hand, Unit labor costs and productivity figures might favor the downside especially if the unit labor costs show the slightest sign of rising.

The market will also have to contend with the last leg of Treasury auctions, with $14 billion in 30 year bonds being floated today. Typically the longer maturities have seen less interest than shorter maturities and that could be why Bonds have generally been weaker than notes on the charts for the last four months. In other words, the bond market appears to have more downside ahead before yields reach a high enough level to consistently attract investment interest. As for the stress tests, Treasury Secretary Geithner has probably taken the sting out of the results with suggestions that no banks are in danger of insolvency and we also suspect that talk of three large banks needing capital (as opposed to just two majors in the prior trading sessions) has set the market up to handle the results with less volatility. While some might argue that a worrisome stress test result will prompt a return flow toward Treasuries as a flight to quality item, we suspect that will be a fleeting reaction and that ultimately the trade will have to worry that more US bank capital needs will mean more US government debt/supply. In the short term, the most dominate theme in the marketplace is optimism toward the economy and while the official jobs report on Friday morning might dent optimism, it would seem like that view is set to control Treasury prices in the action today.

Because of a series of big gaps left on the June bond charts back in November, there really isn’t much in the way of support until the first gap is filled at 119-24, with the second gap not filled until 117-26. It should also be noted that the overnight slide in Bonds pushed the market below all three retracement points on the November through December rally and that would suggest that the trend is set to remain down. In June Notes the market has also managed a weak downside breakout on the charts but the failure isn’t as definitive as in Bonds. Initial support in June Notes comes in at 120-00 and then again down at 119-23. To alter the downtrend pattern in June Notes might require a close above 121-15.

This content originated from – The Hightower Report.