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With a mostly empty US economic report slate today, the US Treasury market will be left with lingering supply side concerns, but perhaps the market will begin to see some marginal support from ongoing weakness in equities. Clearly the recent slide in Treasury prices this week and the commensurate increase in yields is in part factoring in the upcoming explosion in US debt needs and with the US and UK both seeing increased suspicion on their capacity to handle the crisis, we have to think that a default premium is being interjected into Treasury prices. With the Treasury market unable to benefit from a much weaker than expected Housing Starts and Permits report in the prior trading session, it is clear that the market isn’t operating off its typical fundamental patterns. In other words, it would not seem like patently weak (bullish) economic readings are capable of lifting Treasury prices and that in turn means that US mortgage rates have actually begun to creep higher again and that probably increases the pressure on the US real estate sector of the economy. We suspect that the 130-00 level in the March bonds is a weak layer of support, but if the trade is actually considering the creditworthiness of the US, then minor measures of support on the charts will be of little importance. Given the sharp slide in Treasury prices since the December highs (nearly 12 points) it is possible that the threat of the Government purchasing US Treasuries, in an effort to lower mortgage rates, will be a significantly less effective undertaking. In fact, the US government might have to loan directly to ultimate borrower now in an effort to cut through market noise and that in turn could turn up the pressure on the US Treasury futures. Certainly it is premature to suggest that the bond and note markets have totally abandoned their fundamental track, but the failure to hold 130-00 in Bonds and 124-00 in Notes could open the markets up to another quick multiple point slide. Our gut suggests that the Treasuries are poised to continue to slide downward until the stock market returns to the November lows, or the trade gets close enough to the February 6th unemployment release to consider a wave of profit taking in the form of short covering buying. In fact, news that the UK has officially entered into recession and evidence of more weakness in global equity markets overnight has only yielded a minimal bounce of 8 ticks in bonds! The only other major impact on prices today might come from GE earnings report or in the event that the US Treasuries steps forward to buy some Treasuries. Given the overt weakness in Treasuries, the new Administration had better react quickly or the US could be cementing a further deterioration in both residential and commercial real estate values.
