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The Treasury market is under some pressure in the face of the latest Washington stimulus offer, which came in the form of a multi-100 billion Dollar promise from the newly created Office of the President Elect. In addition to the presence of a supply side threat from Washington, the Treasury market is also facing a follow through rally in the equity markets overnight. However, it is also possible that a series of favorable views from US officials on the credit markets over the last several trading sessions is dampening the flight to quality status of the US Treasuries. In addition to favorable credit market dialogue from the US Treasury Secretary last week, the Fed’s Rosengren suggested overnight that credit market conditions have “improved significantly”. On the other hand, the Treasury market has certainty seen real evidence of severe slowing in the form of the monthly Non farm payrolls last Friday and the magnitude of that slack reading should continue to provide some background support for Treasury prices.
With the December 2nd Commitment of Traders with Options report for U.S. Treasury Bonds showing the Non-commercial position to be net short 112,110 contracts, and the Non-reportable position also net short 46,323 contracts, that made the “combined” spec and fund position net short 158,433 contracts as of early last week. While the Bonds remained net spec short in the latest COT positioning report, the fact that March bonds in the wake of the COT mark off managed a rally of just under 4 full points probably still leaves the bonds moderately net spec short. The 10 Year Notes showed a “combined” spec and fund position that was net long a minimal 1,456 contracts, and with the market managing less than a two point rally to last week’s highs, we doubt that the spec long positioning in the Note market was inflated significantly.
In short, the technical condition of the Treasury market should not be an impediment to further price gains. However, with a general recovery in a host of physical commodity markets this morning and ongoing gains in equity prices, it is possible that some market players will temporarily downplay the threats of severe slowing and deflation and that in turn could result in the March Bonds falling back to close-in chart support of 132-09, with similar support in the March notes pegged down at 122-00. With the scheduled report slate mostly empty today and most of the key reports due out later in the week, it is possible that the fear of slowing won’t be as prevalent at the beginning of the week, as it was at the end of last week and that gives the bear camp a temporary edge.
