Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!
The Treasury market remains under pressure in the wake of residual gains in the equity markets and because of another favorable spin to US economic news flow. In addition to a bearish spin on some US manufacturing readings yesterday morning, the markets also seem to have bent over backwards to shape the Fed Beige book into a mild negative for Treasury prices. We suspect that a portion of the liquidation is coming off a combination of long liquidation and fresh short side interest ahead of today’s claims readings. However, the initial estimates seem to call for a rise in the both the ongoing and initial claims data and after an impressive string of declines in those readings recently, it wouldn’t be surprising to see the figures rise.
While the market could also be pressured by news that Bank of America was planning to pay back its TARP funds and that serves to dent the flight to quality angle even further, we think the market was already in a position of expecting a number of banks to pay back their government funds. With the market also seeing an increase in Press coverage of possible exit strategies recently it is clear that the trade is actively hunting for bearish information. While the details of the next auction cycle might also be denting prices, the bid to coverage ratio on recent auctions have all been above the year’s average and the impact of the actual auction has been for prices to rise! Therefore, we think a large amount of the negative bias is indeed coming from long term thinking, which in turn seems to be embracing the view that the Fed will begin to move toward a tightening posture at some point in the near future. However, with Treasury prices to this morning’s lows, sitting roughly 2 points below the November high into the typically critical monthly Non farm payroll report on Friday, the onus is starting to shift onto the back of the bear camp. In other words, seeing even more declines in prices ahead of the Non farm payroll report could mean that the slightest bit of weakness in the report will result in a noted recovery bounce.
In the action today, the market will take a large measure of direction from the claims data, but minor gains in those readings might be partially offset by a minor rise in the ISM Non Manufacturing result. While the trade isn’t expecting the Bernanke re-nomination to be an key event, some political wrangling on that issue might add yet another downward tilt to Treasury prices. In our opinion, the ongoing claims reading will be the primary leading indicator of the day today, but given the 2 point slide off the recent highs, it could take another decline in that reading to keep the downward tilt in Treasuries in place into the US payroll report on Friday morning. We see close-in support in the March bonds at 121-00 this morning, but the market is likely to dip down to 120-23 in the lead up to the scheduled data. Close-in support in March Notes is seen at 118-25, with slightly lower support at 118-19 potentially tested in the lead up to the scheduled reports. In the end, without another decline in ongoing claims, we suspect that Treasuries will see a somewhat tight but two sided trade. Pushed into the market one has to give the bear camp a slight edge.
