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The Trend in Treasuries looks to remain up mostly off the sharp ongoing slide in equities. Apparently the markets are concerned about an extension of the slowing, in the wake of the slack US retail sales readings and the surprise decline in US sentiment figures at the end of last week. Since the declines in equities have now become notable that in turn has sparked a wave of safe haven buying of Treasuries. We suspect that the markets will be ultra sensitive to the NAHB Index and the New York Empire State Manufacturing survey early in the session today. However, in a somewhat strange twist of fate, we suspect that bonds and notes will rally unless both scheduled readings this morning are stronger than initial expectations. With both scheduled readings expected to be minimally above the prior month’s readings, the trade has partially baked into the cake, a gradual improvement in the economy. While the August 11th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 115,575 contracts, with the Non-reportable position net long 7,684 contracts, that made the “combined” spec and fund position net short 107,891 contracts as of early last week. The August 11th Commitment of Traders with Options report for US Treasury 10 Year Notes showed the Non-commercial position to be net short 83,744 contracts, with the Non-reportable position net short 109,241 contracts, and that made the “combined” spec and fund position net short 192,985 contracts as of early last week. However, with September bonds trading as much as 2 full points above the level where the COT report was calculated, we suspect that the net spec short reading in bonds is overstated but because the trade was still net spec short, one can’t rule out even more short covering buying ahead. In fact, with another US financial failure over the weekend, it is possible that fears of a second wave of financial failures is contributing to the upward bias in Treasury prices. In the near term, we can’t rule out a rally back above 120-00 in September bonds and above 118-00 in September Notes, as it could take a couple sessions before the disappointment from the economic front is tamped down. In fact, with a downside breakout in the S&P, putting stocks down to the lowest level since August 3rd, a return to the July highs in Treasuries is now possible. Fortunately for the bear camp in Treasuries, the majority of the weakness in equities is the result of expectations running ahead of reality, as opposed to real fears that the recovery has been lost.
