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US Treasury prices remain within striking distance of the recent consolidation lows and in general one has to conclude that Treasury prices were unable to respond definitively to obvious slowing evidence in the US economy. Some might suggest that the ISM non manufacturing readings were somewhat better than dire expectations and that the sharp almost euphoric rally in the equity markets yesterday at least temporarily reversed the fears of slowing. However, one can hardly discount the discouraging private job survey readings released yesterday, especially given the proximity to the initial claims data today and the monthly payroll readings on Friday morning. Therefore, one has to give the bull case some temporary respect over the coming 48 hours, but if the June bonds are unable to regain the quasi triple top resistance zone of 125-14 through the coming two day’s flow of scheduled data, that will be a telling sign that the bear camp still maintains the edge. However, versus yesterday morning, international equity prices are trading lower partly because traders have become disappointed after the Chinese Premier failed to offer a specific stimulus package. In the end, it is very difficult to get around the potential threat of $2 Trillion in additional/fresh US debt for the anticipated US Bank plan. While the new administration thinks that economic principles and Wall Street don’t work, the Treasury market isn’t about to discount massive supply flows ahead and that in turn could make it very difficult for real US mortgage rates to decline to levels that will serve to slow the default rate of remaining ARM’s and more importantly, getting mortgage rates low enough to slow the deterioration in the housing and real estate markets. In fact, standard mortgage rats are almost poised for an upside breakout, with 30 year mortgages closer to 5.5% than to 5%. With poor auto sales figures early in the week, the potential for another new high in ongoing claims today and the prospect of a weak factory orders report later in the morning trade one would think that June bonds would be able to hold above critical support of 123-10 this morning. However, our gut suggests that a feeble rally attempt will be seen into the numbers today and that prices will then continue to generally track back toward the downside breakout point on the charts. Similar critical chart support in the June Note market is seen at 119-23 and then again down at 119-08 and a recovery bounce to 121-02 should be seen as a selling opportunity today. Ultimately we think the path of least resistance is pointing downward, but the next 24 hours could present some temporary adversity to the Treasury market. Those short futures might want to consider the temporary purchase of April bond or Note calls as a hedge against the upcoming payroll report. Given the sick and sloppy action in Treasuries over the last two weeks, we can’t suggest that speculative traders even attempt a fresh outright long play, off the upcoming payroll report. In our opinion, the government should have offered direct mortgage assistance to the healthy sector of the US economy, as that would have actually served to take some of the pressure off the housing market and that in turn might taken some of the edge off the amount of fresh toxic assets being tossed into the bad debt pile!
