12/14/2010 12:23 pm CST
Volatility in the Treasuries remains fairly high. Over the last couple of weeks, the 30-year rate rose 27 basis points to 4.39% while the 10-yr T-Note rate jumped an impressive 45 basis points to 3.29%. The main impetus for the continuing decline in Treasuries is the apparent bargain struck between President Obama and the Republicans regarding tax and unemployment extensions. A calming of the European sovereign debt storm and generally better-than-expected economic data contributed as well.
Hourly 30-year U.S. Treasury Bond Futures [Continuous Chart]
Source: Ameritrade Think or Swim
While most market participants were expecting some sort of extension of the Bush tax breaks, the overall package can be viewed as more stimulative of economic growth than many anticipated. In addition to the Bush tax breaks being extended across the board, the proposed estate tax was definitely on the low side. It also extends a slew of other tax breaks. It reduces payroll taxes for most workers for one year and extends jobless benefits another 13 months. All in all, it is projected to cost approximately $858 billion over 10 years. This negatively impacted Treasuries on two fronts; (1) the increase in forecast economic growth, which ultimately leads to higher inflation, and (2) the increase in the budget deficit, which ultimately leads to greater supply adding downward pressure and/or higher rates on sovereign debt concerns.
Stepped-up bond buying by the ECB last week and strong comments from the German Finance Minister Wolfgang Schäuble stabilized Eurozone bond spreads and sparked a rally in the Euro. In an interview with the Wall Street Journal last Friday afternoon, he said “his country is prepared to pursue bold action to preserve Europe's common currency, including deeper economic integration with its neighbors, and issued a warning to markets not to underestimate Berlin's resolve to protect the euro.” [Germany Vows Defense of the Euro, Wall Street Journal, 12/11/10]
On balance, recent economic data over the last couple of weeks has been good with mixed to slightly negative jobs news and Tuesday's Producer Price Index showing inflation popping higher. Better-than-expected data includes construction spending, pending home sales, the trade deficit, Michigan consumer sentiment and retail sales. Job–wise, the initial jobless claims were slightly higher the week before last but on expectations last week in what appears to be a very slow but steady downtrend. On a monthly basis, the ADP Employment report was better but the non-farm payrolls – both total and private – came in approximately 100k below expectations.
30 –Year U.S. Treasury Bond Weekly Chart
Source: Ameritrade Think or Swim
Technically, the March T-bond and 10-year T-Note are short-term and intermediate-term bearish with short-term momentum and intermediate-term momentum down. The short-term bear pivots are 122.10 and 121.28 in the 30-year and 10-year respectively. The intermediate-term pivots are 129.24 for the T-bond and 124.18 for the T-note. [One daily close beyond a S-T pivot is needed to change the S-T trend while two daily closes beyond an I-T pivot is needed to change the I-T trend]
The outlook for Treasuries remains bearish. The Treasuries have already reached and pushed to the low side of the longer-term targets of 122.00-120.00 in T-bonds and 120.00-119.00 in T-notes. As our regular readers are aware, the move lower in the Treasuries has occurred much faster than anticipated. We caught a good chunk of the initial move but basically were too conservative in our re-entry points and missed the extension down over the last month. It should not be surprising. The high volatility, which prompted the conservative re-entry attempts, also fueled the size and speed of the sell-off. While the outlook remains firmly bearish, a sizeable correction is overdue. Hence, while we may miss out if the sell-off continues without pause, establishing a position other than a short-term play on the short side would be a low probability/low reward trade. A low risk/high reward play would be buying at or out-of-the-money calls anywhere below 121.00, as long as the 119.24 area is intact. If bought, risk a clear break of the 119.24 area and target the low 126.00s on the upside. In the near-term, a move back above 123.00 would be constructive.
If these major support areas are broken, the next major supports are 115.30-114.06 in the T-bonds and 116.09-114.26 in the T-notes. Also, the long-term bull pivots on the weekly charts are hitting at 116.15 and 117.15 in the T-bonds and T-notes respectively.
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