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The Treasury market continues to show a mild short covering tilt on the charts and a rise above 117-24 in the June bond contract this morning could further the upward bias off purely technical considerations. While the Fed hasn’t really made any noise about increasing their purchases of assets, in an effort tamp down key consumer interest rates, we think that issue is at least partially responsible for the 2 point rally off this week’s lows. If one only looked at the headline economic readings yesterday, you would have come away with a bearish macro economic view toward Treasury prices, but in digging down into the data, it was clear that residual slowing threats remain in place. While the market is fully anticipating a rather sharp decline in the US GDP readings today, the magnitude of the contraction in the economy in the report should foster some light additional short covering buying. We suggest that the market will mostly see weak technical short covering buying, as the trade doesn’t seem to be a buzz with talk that the Fed is poised to step up purchases of Treasuries or mortgage backed securities. In fact, it could take some specific reference or hint from the Fed from a speech somewhere to actually bring on fresh outright buying of bonds and notes. On the other hand, the upcoming COT positioning reports should confirm a greatly expanded net spec short positioning in the Treasury markets. While the report won’t catch all of the weakness (this week’s lows were made after the COT report was to be compiled) the magnitude of the short positioning could be a source of additional short covering buying interest early next week. Since the GDP readings were preempted with preliminary readings we suspect that the Chicago Purchasing Managers report could be the key focal point of the trade today. On the other hand, one should probably expect a slightly bearish (to Treasury prices) but less significant negative price reaction to the Michigan Sentiment readings. A normal retracement of the May slide in June bond prices would allow for a rally back to 118-25 without altering the downtrend pattern. In June notes, a similar retracement bounce could be seen up to 118-26 without altering the technical downtrend pattern. Given the intense focus on the level of Note Yields, it is likely that technical points and market action in the Note market will be seen as the most important indicator for the Treasury trade overall. In our opinion, just seeing the Treasury market bounce, in the face of somewhat decent economic readings and seeing the gains take place in the face of a mild rally in equity prices, highlights the Treasury markets oversold status and that in turn suggests that June Notes are capable of re-testing the 118-10 level, with a similar short term recovery target in June bonds today seen up at 118-02. In conclusion, a mild but weak upward bias looks to remain in place, with really aggressive upside action not in the cards, unless the Fed becomes more vocal about upcoming purchases! Unfortunately, for the bulls the Fed seems to have discounted the prospect of near term purchasing of Treasuries by suggesting they are not setting rates, they are merely attempting to facilitate liquidity in the credit markets.

This content originated from – The Hightower Report.
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