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While signs of normalcy in the economy could at times be positive to Treasuries (that reduces fears of unrelenting supply flow), seeing the attitude toward the economy persistently improve ultimately looks to have applied some pressure to Treasury prices this morning. With the US equity market managing to throw off the weakness from yesterday morning, off ideas that retailers in the US like Bed Bath and Beyond were able to produce better than expected earnings, we suspect that served to put bonds and notes back into a position to slide in the wake of positive numbers. With the market also seeing a record drop in wholesale inventories yesterday the Treasury market initially seemed to benefit from the signs of normalcy. But with the recovery in the stock market overnight and the expectation of a decline in initial unemployment claims, it would appear that the market is being faced with a profit taking posture into the US opening. The Treasury market might also see a further narrowing of the US Trade deficit and that might lend some minor support to the market today. But we would not expect that report to be a sustained influence on prices. The Treasury will float $18 billion in 10 year notes today and typically the appetite for Treasuries has waned in the later part of the auction and the market also seems to show somewhat less interest in the longer term maturities. On the other hand, the magnitude of the rally seen in the prior trading session was in retrospect really unimpressive when one considers that the Federal Reserve stepped in and bought for the seventh time yesterday. All things considered the bull camp has to come away from the action this week with ideas that renewed financial sector anxiety and moderate weakness in the equity market is only worth a minimal and temporary rise in Treasury prices. In fact, we suspect that the 127-29 level in June bonds has become a new solid resistance point with the market probably poised to slide back toward consolidation support of 126-01. In the June Notes we see the 122-26 level as a fairly significant resistance level and that prices were now poised to see a return to the consolidation lows down at 121-26. So far, it is not clear how the Treasury feels about the news that TARP funds are going to be used for Life Insurers but that development and news of the delay in the release of the US banking system stress test until the end of April certainly leaves the fear of excessive supply hanging over the market in the near term. While the initial claims might be slightly negative to prices this morning, we suspect that another build in ongoing claims and perhaps another record reading in that report will serve as a partial underpin to prices in the early going today. In the end, the path of least resistance remains down and traders should look to sell rallies of 10 to 15 ticks if given the chance today.
