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The Treasury market started out on a slightly weaker footing this morning and with the US economic report slate this morning mostly empty, the market might be forced to focus on political dialogue from the auto sector and anecdotal press reports on the pace of US holiday sales. Certainly the market was at least partially overbought as a result of this week’s breakneck rally, with the March bonds managing a low to high range on the week of almost 8 points. However, even though the market has managed an astonishing 31 point rally in Bonds over the last two months, the last COT positioning report for bonds still showed the market to be net spec short a rather sizeable amount and that suggests that the market overall probably retains some buying capacity. Apparently Treasuries did see some profit taking in the overnight trade, but we suspect that the market will throw off the profit taking mentality in the event that the White House leans toward a controlled bankruptcy of the auto sector. In fact, the latest word out of the White House was that they would not allow a “disorderly” collapse of the industry nor do they want to see a controlled bankruptcy but in the end it would seem like they are only preparing for a minimal amount of assistance. We would think that a tough stance toward Detroit would provide a fresh wave of buying of US Treasuries today which would probably send prices to fresh news highs again. While the press is suggesting that a deal will be announced today the press has been saying that since Wednesday morning. We assume that the fear of a poor outcome on the auto sector issue has provided support to the Treasury market on numerous occasions over the last several weeks and therefore just seeing any type of deal could prompt a minor wave of profit taking, especially if the stock market manages to return to its recent highs in the wake of the announcement. Corrective support in March Bonds is seen at 140-12 and then again down at 139-11 and perhaps even down at 138-09, as the propensity for significant volatility is high because of the pace of the recent gains. Initial support in March Notes is seen at 127-17, 127-10 and perhaps even down at 126-22. Those that are long futures should consider protecting those positions with the purchase of puts, as a way to dampen the impact of today’s headline flow.
