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It would appear that last week’s lows have become a little more entrenched as some form of support in the wake of the sharp recoil from the recent lows especially in the wake of subsequent suggestions from the Fed that low rates will still be needed for an extended period of time. It is possible that the trade saw the extended string of declines in US Construction Spending report yesterday as a sign that pockets of noted weakness remain in the US economy.
With the Dollar showing more weakness this morning (but not too much weakness) it is possible that some foreign players are seeing US Treasury yields as attractive. With US pending home sales expected to be down this morning and Factory Orders expected to rise marginally, it is possible that Treasuries will be presented with a similar data flow as was seen in the prior trading session and yet prices were able to rally yesterday. However, the early potential to rally might be truncated quickly in the face of favorable US auto sales data that is due later in the trading session. We think that the trade is having second thoughts about keeping prices down hard into the non farm payroll report, as a March Note price sitting at 115-00, or a March Bond price down at 114-22 would probably result in a significant short covering rally in the face of any payroll gain in excess of the prior months -11,000 figure. However, the payroll report is a long way off in terms of market developments, with an active slate of data due in every day, upcoming supply terms to be announced and another round of initial and ongoing claims all scheduled before the monthly numbers take center stage.
We would suggest that traders monitor the correlation between a slightly weaker Dollar and marginally higher Treasury prices, as some foreign interests might be picking up some yield. While the December 29th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 101,474 contracts, with the Non-reportable position also net short 11,480 contracts, and that made the “combined” spec and fund position net short 112,954 contracts as of early last week, that reading is only marginally supportive to the market. Similarly the 10 Year Notes showed a “combined” spec and fund position that was net short 196,688 contracts as of early last week, which is a partially oversold condition, but certainly not an extreme positioning.
While we see the scope for a slight short covering bounce to perhaps the 116-00 level in March bonds and to 116-04 in March Notes, it is likely that the market will generally remain hemmed in ahead of the Friday payroll report. If fact, the short covering bias might have the edge, unless the scheduled numbers this morning both come in better than expected.
Perhaps some in the trade are looking ahead to the release of the FOMC meeting minutes on Wednesday, as many in the trade think that those minutes will continue to highlight a Fed that conclusively wants to keep the Fed funds rate down. With the Fed’s Duke reiterating the low rate mantra again yesterday that probably telegraphs the rest of the Fed’s intentions, especially since Duke suggested that the “FOMC” wanted to keep rates down. In conclusion, a minor short covering tilt is in place, as the market banks profits off the sharp December slide.
Bond Market Commentary – 2010.01.05
by Dave Hightower on January 5, 2010
Below is a sample of our Daily Commentary. To get this comment, and our daily coverage of 15 additional markets and trade ideas, visit futures-research.com for your free 2 week trial!
It would appear that last week’s lows have become a little more entrenched as some form of support in the wake of the sharp recoil from the recent lows especially in the wake of subsequent suggestions from the Fed that low rates will still be needed for an extended period of time. It is possible that the trade saw the extended string of declines in US Construction Spending report yesterday as a sign that pockets of noted weakness remain in the US economy.
With the Dollar showing more weakness this morning (but not too much weakness) it is possible that some foreign players are seeing US Treasury yields as attractive. With US pending home sales expected to be down this morning and Factory Orders expected to rise marginally, it is possible that Treasuries will be presented with a similar data flow as was seen in the prior trading session and yet prices were able to rally yesterday. However, the early potential to rally might be truncated quickly in the face of favorable US auto sales data that is due later in the trading session. We think that the trade is having second thoughts about keeping prices down hard into the non farm payroll report, as a March Note price sitting at 115-00, or a March Bond price down at 114-22 would probably result in a significant short covering rally in the face of any payroll gain in excess of the prior months -11,000 figure. However, the payroll report is a long way off in terms of market developments, with an active slate of data due in every day, upcoming supply terms to be announced and another round of initial and ongoing claims all scheduled before the monthly numbers take center stage.
We would suggest that traders monitor the correlation between a slightly weaker Dollar and marginally higher Treasury prices, as some foreign interests might be picking up some yield. While the December 29th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 101,474 contracts, with the Non-reportable position also net short 11,480 contracts, and that made the “combined” spec and fund position net short 112,954 contracts as of early last week, that reading is only marginally supportive to the market. Similarly the 10 Year Notes showed a “combined” spec and fund position that was net short 196,688 contracts as of early last week, which is a partially oversold condition, but certainly not an extreme positioning.
While we see the scope for a slight short covering bounce to perhaps the 116-00 level in March bonds and to 116-04 in March Notes, it is likely that the market will generally remain hemmed in ahead of the Friday payroll report. If fact, the short covering bias might have the edge, unless the scheduled numbers this morning both come in better than expected.
Perhaps some in the trade are looking ahead to the release of the FOMC meeting minutes on Wednesday, as many in the trade think that those minutes will continue to highlight a Fed that conclusively wants to keep the Fed funds rate down. With the Fed’s Duke reiterating the low rate mantra again yesterday that probably telegraphs the rest of the Fed’s intentions, especially since Duke suggested that the “FOMC” wanted to keep rates down. In conclusion, a minor short covering tilt is in place, as the market banks profits off the sharp December slide.
Tags: Bonds, Financials, Interest Rates, Notes
About Dave Hightower