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After another session of discounting seemingly bearish developments on Wednesday, the US Treasury markets appear to be showing some additional but marginal strength today. While we suspect the recent gains are coming partly because of the constant drum beat of suggestions that the global recovery will be a jobless recovery, it is also possible that some strength is being derived from the promise that low interest rates will be maintained. However, the Treasury market did exhibit some weakness in the wake of a strong US Industrial Production report that clearly got the attention of the markets. While there has been some talk about extracting the historic easing in place in the wake of the sub-prime crisis, the market has only given that argument passing attention this week. In fact, given the better than expected US number flow this week and the sharp rate of gain in equities, we would have expected December bonds to have streaked back below the September low of 117-18, with December Notes seeing a similar slide back down to 116-18 if there were distinct fears of tightening in the marketplace. In looking to the action today, the market will be faced with another rather active slate of economic data and perhaps even ideas that health care reform is poised to move forward. While the US data flow this morning might be partially offsetting (claims could be bullish, while Housing readings might be bearish) we would think that aggressive forward progress on the Health Care reform bill would eventually be seen as another budget busting threat for Treasuries. In the event that the trade begins to fear a rise in interest rates, we suspect that impact will be primarily seen in the long end of the market, as the short end of the market would seem to be set to remain in vogue longer than the other end of the yield curve. In fact, in the Asian trade last night there were indications that demand was surfacing on weakness in the short end of the market. In short, one might expect a slight rise in Treasuries the wake of the initial and ongoing claims data this morning, but that impetus will probably be very short lived if the Housing Starts and Permits data rise to or above expectations. With Asian equities showing strength again last night and the US data generally holding together we have to give the bull camp the ultimate edge, especially if the housing numbers this morning manage to come in above expectations. While it appears as if the Treasury market is hesitant to fall, the bears still look to have more ammunition than the bull camp today. In order to throw off our slightly bearish bias today, might require a rise back above 119-15 in December Bonds and or a move back above 117-08 in December Notes.
