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The Treasury market comes into the action today slightly above the prior session’s lows and seemingly catching a slight bid. While some minor weakness in equity prices yesterday and the sharp drop off in the Dallas Fed Manufacturing readings from the prior session are probably behind the minor bounce in prices this morning, the bull camp faces an uphill battle of supply in the action today. In fact, the Treasury will auction $42 billion in 2 Year debt today and that will be followed by $39 billion in 5 Year Notes on Wednesday. It is also possible that the bull camp is betting on another sharp decline in a private home price survey reading, as the favorable existing and new home sales gains recently reported are likely the result of another round of significant price reductions. In other words, the outlook on the economy is likely to be revived a bit today and without the flow of supply today the bull camp would seem to have a distinct edge. In fact, with the trade generally expecting weak economic vibes from both Consumer Confidence and Case-Shiller reports, that should give the bull camp the initial edge. However, with the auction results expected around mid session today and some favorable Asian equity market action seen overnight, there are some countervailing influences to the bull case in the marketplace this morning.
With September Bonds sitting almost 5 full points below the early July highs, there would seem to be a moderate amount of optimism on the economy already factored into current prices. Some might even suggest that Treasury bond prices sitting 6 points below the July highs and 25 points below the December 2008 highs, the market is also pricing in at least a portion of the looming supply avalanche. With recent auctions either going well or mostly better than expected, one has to give the edge to the bull camp today. One caveat, if the auctions don’t come off well, that result could literally slam the equity markets and in turn rock Treasury prices. Therefore, we suspect that Bonds and notes are due for a bit of a bounce today, with the Treasury Secretary becoming the man behind the curtain, with respect to twisting foreign central bank arms.
September Bonds look to have initial resistance up at 116-12 off the numbers, with higher resistance potentially tested up at 118-00 in the face of a favorable auction result. Similarly, initial resistance in September notes is seen at 116-16, with higher resistance tested up at 118-00 in the event that the auctions come off well. While we don’t expect the auction to see poor demand today, slack demand for the 2 year Notes could set the stage for a slide in September bonds back below 114-00, a discouraging auction result could produce a more significant slide in September notes down to 114-26.
