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The Treasury market looks to face more adversity directly ahead as the recent chart breakdown is accentuated by the presence of looming supply. With equity prices this morning also showing a slightly positive track and the Asian Treasury trade apparently pondering the prospects of a shorter slow down in the US economy in the wake of the anticipated US stimulus plan, a number of angles seem to leave the bear camp with the edge. However, another round of slow scheduled US data this morning should provide some measure of fleeting support but with $24 billion in 4 week supply being offered today, the bull camp can’t expect to completely get out from under the selling pressure. However, better than expected interest in the supply auctioned yesterday (3 and 6 month bills) would seem to serve notice that flight to quality interest is still present, but apparently that interest not strong enough to countervail even more bearish broad market forces. In fact, with the equity markets showing noted gains this morning we suspect that Treasury prices could continue to decline, with the next chart support level in the March bonds seen down at 132-00. Clearly the market is fomenting optimism toward some form of recovery at some point in 2008 and given a number of forecasts floated since the beginning of the year, the Treasury market is clearly pulling forward the recovery timing. However, the market is still going to be confronted with some very serious slowing numbers in the coming four trading sessions, but it could take an extremely negative non Farm payroll report on Friday morning just to begin to check up the slide in Treasury prices. In fact, it might take threatening dialogue from the government about forcing long rates down and a very weak Non farm payroll report just to rekindle a sustained recovery in prices. However, it would appear that the market is currently partially immune to typical scheduled data flow and as we draw closer to the shift in power, it is possible that political euphoria will attempt to pick up where the “New Year euphoria” from analysts left off. In conclusion, the near term path of least resistance is pointing down, but once the new regime takes control they will probably address the need to take mortgage rates back down again. In fact, after threatening the sub 5% level in the 30 year mortgage rate area, rates have now drifted back upward and we suspect that there will less incentive to “refinance” and for new home loans and that could eventually temper any hope of improvement in the housing sector. From a technical perspective, we think that the market is once again becoming moderately oversold as the December 30th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 123,628 contracts, with the Non-reportable position net short 29,032 contracts and that made the “combined” spec and fund position net short 152,660 contracts as of early last week. When one considers that March bonds were trading at 141-13 when the COT report was measured and that the low in the prior session was 8 1/2 points below the level where the COT report was calculated, that would suggest that the net spec short positioning in bonds into the opening today is seriously understated. While the 10 year Notes were less oversold than bonds, with a “combined” spec and fund net short position of 18,442 contracts as of early last week, that market to the prior session’s lows was also roughly 4 points below the level where the COT report was measured. In conclusion, the technicals could eventually lend some support to prices, but we are not even sure that patently supportive data will turn the near term tide of selling.
