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The Treasury market has once again recoiled from a quasi spike down move with the trade potentially keying off even number yield levels in the 10 year Notes. While the market will be presented with the Chicago Fed National Activity reading and the Leading Indicator report this morning, the main focal point of the trade might be the Bank of America earnings. Prior to last week’s sharp slide in prices, we thought it was possible for the Treasury market to bounce in the face of a quasi “all clear” from the US financial sector, as that could have tamped down the fear of ever exploding debt levels from the US. In fact, at times over the last two months, the Treasury market also seems to have been negatively impacted in the face of softer than expected US economic readings, because the trade was again concerned that run away slowing might prompt the US government to talk up the prospect of another stimulus package which in turn would also serve to pump up the supply of US Treasuries. Therefore, the market seems to be predisposed to fret over the prospect of supply and even with it sees developments that could eventually reduce supply, it hasn’t given those developments much credence. While the Chicago Fed National Activity Index is generally expected to show a minor down tick, the Leading Indicator report might countervail that news with a slightly up tick.
The April 14th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 71,822 contracts, with the Non-reportable position also net short 22,573 contracts, and that made the “combined” spec and fund position net short 94,395 contracts as of early last week. The Note market also showed a “combined” spec and fund position that was net short 58,371 contracts as of early last week. Surprisingly the magnitude of the net spec short positioning in the bond market has generally declined, despite seeing prices work lower over the last six weeks. In other words, it would seem like the specs are slowly lowering their net short positioning, perhaps because the outlook for the economy is tracking away from a total disaster. We also suspect that a number of spec shorts decided to exit their positions in the face of the Fed’s announcement to purchase Treasuries.
In the near term, we suspect that economic numbers will be weak enough to provide the June bonds with solid support at the 125-00 level, with similar support in the June Notes seen at 121-29. On the other hand, if there is a big move in the market, we suspect that the bear camp will prevail, as the trade seems intent to push up borrowing costs to the US government. On the other hand, given the weak start in the equity markets this morning and the talk of an earnings driven correction potentially ahead in the stock market, it is possible that Treasuries will see a temporary light bid today. Initial resistance in the June bonds is seen at 126-13, with similar resistance in June Notes pegged at 122-28.
