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The Treasury market starts the week out moderately below last week’s highs, but also moderately above the overnight low. While the market is set to face another wave of US supply this week, the amount of supply to be auctioned this week is markedly below some of the recent sales tallies. With $70 billion to be auctioned and $38 billion of that to come off today in 3 Year notes, the brunt of the auction supply will be seen in one tranche. We suspect that the G20 meeting provided a large portion of the bounce off the overnight lows, as several leaders made it clear that low interest rates and special easing were set to remain in place for the foreseeable future. While some Asian equity markets were showing positive action overnight, we suspect that will exert only minimal pressure on Treasury prices in the early action today. We also suspect that a fresh new low in the US Dollar overnight has discouraged some initial buying interest today, but the combination of a lower Dollar and weaker Treasury prices over the last three trading sessions could increase the foreign interest in the coming US Treasury auction cycle! It is possible that fresh new highs in the gold market is another force that is holding back the Treasury market, as gold prices above the psychological $1,000 an ounce level fosters the inflation outlook. Apparently traders in the gold market are being lifted by the slide in the Dollar, but it is also possible that the promise to leave interest rates and special easing in place from the G20m is serving to foster inflationary aspirations. From a technical perspective, the September 1st Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 69,887 contracts, with the Non-reportable position net long 2,615 contracts and that made the “combined” spec and fund position net short 67,272 contracts as of early last week. With the net spec short positioning in bonds, falling to the lowest level since early 2008, one could come to the conclusion that the shorts are clearly doubting their positioning perhaps because of lingering employment concerns, but more than likely because the promise to engineer and entrench low global interest rates! Even the Note Market has worked its net spec short position down to just 131,096 contracts as of early last week and one could also suggest that bonds and notes now have less short covering capacity to lift Treasury prices than at any time over the last year. In the face of minor equity market gains ahead and ongoing merger and acquisition activity, the onus is on the bull camp to prove that Treasury prices aren’t in a downward track. In fact, it will take a strong auction result later this morning to propel December bonds back above the 120-00 level later today. We see initial resistance in December Bonds at 119-14, with similar resistance in December Notes seen at 117-12. Near term downside targeting in December bonds is seen at 116-29 but traders might expect some recovery attempt in the market into the mid day Treasury auction results! Near term downside targeting in December Notes is seen at 116-22 but like Bonds we would suggest that the trade expect a short covering bounce in the wake of the Treasury action late this morning.
