September Treasury Bonds advanced overnight on growing concern the U.S. recovery is stalling, increasing demand for the relative safety of government debt.

Traders are driving down yields of T-Notes and T-Bonds in anticipation of a drop in Existing Home Sales today and a moderate growth in the U.S. GDP on Friday. Adding to the decline in yields is the increasing supply of government debt. The government plans to sell $37 billion in Two-Year Notes today.

The recent rally in September T-Bonds was ignited earlier this month when the Fed announced it was buying Treasuries. Despite predictions of a “bubble”, demand has been brisk. Deflation fears are definitely growing, giving investors a strong reason to purchase long-term government debt.

The strong surge overnight may be a reflection of demand for Treasuries ahead of Fed Chairman Bernanke’s speech on Thursday at the central banker’s conference in Jackson Hole, Wyoming.

If investors are buying Treasuries on concern the U.S. recovery is stalling, then today’s Existing Home Sales Report should be a market mover. Analysts are forecasting a decline from 5.37M to 4.60M or a decline of 14%. The consensus is calling for 4.72M.

Adding fuel to the fire this morning is a report from the Wall Street Journal saying the Fed was divided over monetary policy direction at its last meeting. It is being reported that at least seven of 17 Federal Reserve officials opposed or balked at the decision to stimulate the economy by keeping the Fed’s securities portfolio from winding down. The key issue was whether the central bank should reinvest the proceeds from mortgages back into the markets.

The Fed was divided by those members who were concerned about the economy and “more inclined to act” and those who doubted the effectiveness of the move and the negative message it would send to the markets.

Although each camp was permitted to express its concerns, the Federal Opening Market Committee sided with Bernanke who pushed for the move and ultimately prevailed. Despite close to 50% of Fed officials opposing the decision, voting members favored the decision 9 to 1.

The overnight rally in the September Treasury Bonds may be reflecting the fear that the economy is headed toward a double-dip recession. The Wall Street Journal article may be helping to fuel a portion of this rally as it provided more reason for investors to worry. If there is evidence of dissention in the Fed, then how can investors have confidence in its decisions?  Anyway one looks at it, the Fed definitely stirred the pot this time. What the Fed’s recent action reveals is that it is actively influencing the financial markets and the perception is things are going to get worse.

Technically, September Treasury Bonds are up sharply overnight. This rally is threatening the potentially bearish closing price reversal top formed on August 20 and confirmed on Monday. This pattern usually leads to a 2 to 3 day break of at least 50% of the last swing up. In this case, the chart pattern was suggesting a break to 130’20 by Wednesday. A trade through 135’07 will negate the pattern and could trigger an acceleration to the upside.

September 10-Year Notes are threatening to take out the recent top at 126’08, However if this top cannot be penetrated then look for the start of possible long liquidation. Based on the current chart pattern on the daily, a move through 125’06 will turn the main trend down.
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