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The Treasury market mostly remains well bid on the charts and has managed to remain within close striking distance of the recent highs, despite a rally in the equity markets yesterday morning and generally favorable economic news. In fact, in addition to discounting a series of up beat economic readings in the prior session, the Treasury market also managed to digest an auction result that might not have been up to recent standards. Furthermore, a portion of the trade thinks that the upcoming auction of $35 billion in Five year Notes might be the strongest tranche of the current auction cycle.
Apparently the market is anticipating slightly bearish US scheduled data flow again this morning, with the US Durable Goods and New Home sales figures both expected to post improvements later today. However, with overnight equity market action mostly non-descript, the Treasury market doesn’t look to have as much outside market pressure facing the trade in the early going today as was seen yesterday. Clearly the Treasury market was at least partially undermined yesterday by recently revised US budget deficit projections, as ramped up debt projections served to rekindle forward supply fears again. Therefore, the upcoming auction results probably takes on an added level of importance today and the bull camp in Treasuries has to hope that investors will show increased attention at the longer end of the market. Therefore, unless the auction goes off better than expected, we suspect that any bullish bias will be short lived.
Certainly seeing a disappointingly bad scheduled report slate this morning could revive the bull’s case, but without help from the numbers, or a sharp setback in equity prices, the bull camp could be fortunate to claw its way back to this week’s highs. In the early action today, it would seem like the bull camp has a slight edge, perhaps off of news that Toyota was set to trim production by 10%. Countervailing the Japanese auto maker news, were reports that the German August IFo reading climbed to 90.5 from just 88.8 in the prior monthly reading. In the end, we would think a noted gain in Durable goods and a modest gain in new home sales would be enough to cap the upside. However, some traders have suggested that the Durable goods report could be a surprise reading today and the trade might see that report as the primary reading of the session.
Initial support is pegged at 119-01 and then again at 118-16 basis December bonds. In December Notes, initial support is seen at 116-07 and then again down at 116-01. Some players suggested that a sharp decline in energy stocks, in the prior trading session prompted some players to conclude that inflation was going to remain under control in the near term, but that seems to be an overly bullish interpretation. At least into the scheduled data this morning we see resistance in December bonds at 119-16 and then again up at 119-21. Similar resistance in December notes is seen at 116-21 and then again up at 117-00.
