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The Treasury market failed to see distinct flight to quality buying surface in the prior trading session. Somewhat surprisingly the Treasury market was unable to forge a fresh new high for the move yesterday, despite seeing a positive reaction to the 3 Year Note Auction and ideas that US rates were destined to remain low from a US Fed member. However, the Fed’s Hoenig remains a dissenting force on Fed policy, with that lone policy hawk reiterating his view that the US needs to raise rates later this year to avoid a track toward inflation. In our opinion, Hoenig losses a lot of credibility by suggesting that European travails weren’t going to drag on the US economy, because that area is only 15% of US exports. In other words, we have another official that is willing to discount an important component of the economy regardless of the historical ramifications of a double dip recession on a government and US Fed that are neck deep in debt!
Statements from the Fed Chairman were somewhat balanced in his speech yesterday, as he expected the US to avoid a double dip recession, but he conceded to an ongoing threat from the Euro zone situation. While international equity markets were boosted by talk of favorable Chinese export numbers overnight, we still get the sense that risk aversion remains in place, as US equities are modestly lower in the early trade today. In looking to the $21 billion in 10 Year Note auction later today, dealers expect fairly robust demand for the instruments, but we think that the market might see the typical 8 to 12 tick corrective slide in the wake of the auction results, as the longer end of the market usually sees a buy the rumor, sell the fact type reaction. While Greece GDP was reported to be down 1% overnight and that reading is a touch worse than the initial prediction of -.8%, we would suggest that a 1% decline in GDP is not as bad as the dire picture painted by the markets over the last 4 months. In short, it should be very difficult to remove the flight to quality bid from Treasuries today, especially since the US economic data flow today is thin, with the Wholesale Trade figures not expected to shift economic sentiment markedly.
In conclusion, we see fairly solid support under the market today, with the prospect of a temporary dip down to 123-30 in September bonds in the wake of the auction results. We see similar support in the September Notes down at 120-22, with the market probably set to take a lot of direction from the equity markets early in the trading session. In the event of a surprise break in excess of 1 point in either bonds or notes, we would suggest that traders consider the sale of just out of the money puts, as the Fed looks committed to holding interest rates down and the threat of deflation currently looks to be a prevalent market feature for the near future.
Bond Market Commentary – 2010.06.09
by Dave Hightower on June 9, 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!
The Treasury market failed to see distinct flight to quality buying surface in the prior trading session. Somewhat surprisingly the Treasury market was unable to forge a fresh new high for the move yesterday, despite seeing a positive reaction to the 3 Year Note Auction and ideas that US rates were destined to remain low from a US Fed member. However, the Fed’s Hoenig remains a dissenting force on Fed policy, with that lone policy hawk reiterating his view that the US needs to raise rates later this year to avoid a track toward inflation. In our opinion, Hoenig losses a lot of credibility by suggesting that European travails weren’t going to drag on the US economy, because that area is only 15% of US exports. In other words, we have another official that is willing to discount an important component of the economy regardless of the historical ramifications of a double dip recession on a government and US Fed that are neck deep in debt!
Statements from the Fed Chairman were somewhat balanced in his speech yesterday, as he expected the US to avoid a double dip recession, but he conceded to an ongoing threat from the Euro zone situation. While international equity markets were boosted by talk of favorable Chinese export numbers overnight, we still get the sense that risk aversion remains in place, as US equities are modestly lower in the early trade today. In looking to the $21 billion in 10 Year Note auction later today, dealers expect fairly robust demand for the instruments, but we think that the market might see the typical 8 to 12 tick corrective slide in the wake of the auction results, as the longer end of the market usually sees a buy the rumor, sell the fact type reaction. While Greece GDP was reported to be down 1% overnight and that reading is a touch worse than the initial prediction of -.8%, we would suggest that a 1% decline in GDP is not as bad as the dire picture painted by the markets over the last 4 months. In short, it should be very difficult to remove the flight to quality bid from Treasuries today, especially since the US economic data flow today is thin, with the Wholesale Trade figures not expected to shift economic sentiment markedly.
In conclusion, we see fairly solid support under the market today, with the prospect of a temporary dip down to 123-30 in September bonds in the wake of the auction results. We see similar support in the September Notes down at 120-22, with the market probably set to take a lot of direction from the equity markets early in the trading session. In the event of a surprise break in excess of 1 point in either bonds or notes, we would suggest that traders consider the sale of just out of the money puts, as the Fed looks committed to holding interest rates down and the threat of deflation currently looks to be a prevalent market feature for the near future.
Tags: Bonds, Interest Rates, Notes
About Dave Hightower