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The Treasury market comes into the last trading day of the week sitting almost in the middle of this week’s trading range. With retail sales and a consumer sentiment reading capping off an extremely thin week of US economic reports the Treasury market will get some needed direction on the US economy. However, estimates for the reports today would seem to mirror the state of the economy, which seems to be mostly limping very slowly toward recovery. With the Nikkei managing a noted rise overnight and other equity markets making noted early gains the equity market action might end up being the swing factor for US Treasuries prices later today. In fact, with the S&P, in the very early Friday morning action, managing to reach another new high for the year, that could serve to limit Treasury prices in the face of a slightly softer US retail sales reading. In retrospect, the auction results this week were supportive to prices (even the 30 year bonds) and that clearly helped the market bounce up and away from this week’s lows, but that residual support probably dissipates today as the trade begins to look ahead to next week’s FOMC meeting. While analysts expect the US retail sales reading to post a minor decline, it would seem like the Press and portions of the trade are also poised to discount that decline as another number impacted by adverse February weather. Therefore, the number on its face might provide some initial support, but the capacity to bounce might be limited by ideas that the number doesn’t represent the real state of the US economy.

We are actually somewhat surprised that the Treasury market has been able to sustain the half point bounce off this week’s lows in the face of the new highs for the move in the Nasdaq and S&P in the early Friday morning trade. In the recent past, action in the equity markets seemed to exaggerate views on scheduled data, but unless the retail sales figures come in better than expectations this morning, favorable equity market action could have a difficult time spinning a negative retail sales reading, into a reading that depicts robust recovery action. However, the sentiment figures might take on added importance today, especially if they manage to post an improvement. In short, we can’t argue against an initial pulse up to close-in chart resistance of 116-21 in June bonds and to 116-26 in June Notes, but it could take a surprise rekindling of the Greek debt situation and or a major reversal in equities to give the bull camp definitive control over Treasury prices today. In fact, the Asian trade was seemingly trying to foster talk that the Fed meeting next week bring about some hawkish dialogue from the Fed and that would certainly temper recent claims that US policy would be on hold for a full 6 months. For today’s action, we have to think that the bull tilt will see its best trade in the lead up to the retail sales report, but given the markets capacity to discount soft readings because of the weather, one gets the feeling that the overall trend in the Treasury market is generally set to remain down.

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Apparently Treasury prices were lifted late Wednesday in the face of some initial weakness in global equity prices, but it is possible that prices might have been lifted by early reports of yet another earthquake ( centered in Taiwan). Clearly Treasuries were lifted in the wake of the Fed Beige book yesterday perhaps because the Fed merely acknowledged the impact of severe February weather on the numbers and that theme has been offered up as an impact on the Friday numbers. However, the Fed Beige Book also noted growth across most Fed sections even though they made note of the weather impact. With the additional commentary that “layoffs slowed” and that hiring plans were anemic, that probably signaled to the market that the US jobs sector remains weak and with the key monthly reading just ahead, that prompted the Treasury market to recover and perhaps to see some fresh outright buying for a speculative play on the Friday payroll reports. We also think that renewed talk about the “Volcker Rule” rekindles some concern that Treasuries might once again be one of the few investments available to Banks. It also seems as if the Greece situation is mostly under control overnight, as that country launched a debt offering today and the results early on seemed to be mostly OK and that could serve to drain some flight to quality buying interest from the Treasury market.

In looking ahead to the scheduled data flow today, the markets will see a very active flow of data, with the weekly claims data, Pending Home sales and Factory orders. There is also a US Productivity reading to be released today and we suspect that will be supportive to Treasuries, as the job market remains soft enough, that employers are continuing to squeeze out production from an aggressively trimmed work force. However, until there is a higher degree of uncertainty on the hike/no hike question, the Productivity reading shouldn’t be seen as an overly important reading. In the other reports, the trade seems to be expecting a modest gain in Factory Orders and also in Pending Home sales and that could be limiting for Treasury prices, but only if the claims data, released ahead of the second set of data, manages to show some declines.

In conclusion, we think that the claims data will be the most important data of the day, with the Pending Home sales report, the report that might be capable of providing the biggest surprise. Therefore, we think that the upside will remain limited by the data today, with the June bonds potentially finding it difficult to rise above 117-17 and Notes above the 117-18 level. In fact, if the claims data shows the type of declines predicted by some economists, the Treasury market could see a mostly bearish track throughout the morning trading session. We suspect that ranges might be narrowed later today due to the US Non Farm payroll report on Friday morning, unless of course the stock market takes out the Tuesday lows off some fresh disconcerting development.

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The Treasury market had the benefit of Bernanke comments in the prior trading session, as slack auction results could have sunk prices, but apparently the promise of holding US rates down ruled the trade. With Bernanke pointing to a stubborn job market and low inflation as justification for the Fed’s on-hold strategy, the market was able to reach up to the highest level since February 10th. Treasury prices have remained just below the prior session’s highs through the overnight action, with residual Greece concerns and marginally lower global equity prices providing the bulls with the edge. With a Greek official lashing out against the German people and questioning the intelligence of EU leadership, one gets the impression that the negotiations between the two entities is on the rocks again. With protests continuing in Greece, a major ratings agency has suggested that a downgrade could be forth coming. Therefore, Treasuries are poised to get some residual flight to quality support, which comes on top of a very disappointing US new home sales report on Wednesday morning. In short, the outlook for the US recovery is suspect again and support from flight to quality angles is expected to continue to surface. However, the market will be presented with the last round of Treasury auctions later today, with $32 billion in 7 Year notes to be floated and that could take away some of the early gains in prices. Ultimately, we suspect that ongoing concern for the slow pace of the recovery is capable of offsetting what is expected to be slack demand for the longest maturity in the current auction cycle. With residual slowing fears seen from international economic readings, ongoing Chinese tightening fears and the recent flow of slack US numbers, it is possible that the fear of supply will simply be glossed over today. In fact, the Durable Goods report might be discounted this morning, especially if the report shows an as expected modest gain of only +1% to +1.5%. In other words, it will take a definitively stronger than expected US Durable Goods report or something favorable from the claims data just to alter the upward tilt in Treasury prices. We suspect that Bernanke testimony today will carry less weight because his views were presented in the prior trading session. However, one should not expect to see aggressive gains in US Treasuries unless that action is prompted by a severe breakdown in the Greece situation or by a very hard slide in US equities. In the end, one has to concede to a slow grinding rise in Treasury prices in the early action today, with the gains tempered into and through the mid day auction results. Given the economic setup today, June bonds might see little in the way of resistance until the 117-00 level, with similar resistance in June Notes not seen until 117-10. For the time being, close-in support looks to present itself at 116-20 in June bonds and at 116-27 in June Notes. In general, expect slow grinding gains on the charts ahead.

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We are a little surprised to see Treasury prices still holding close to the recent consolidation high zone around 117-28 in March bonds, especially after stories surfaced overnight about China potentially moving to reduce its holdings of US debt. While some might have been inclined to press US Treasuries in the wake of ongoing debt concerns, there is a fresh movement afoot in Washington to meet the publics cry for reigning in US spending. However, seeing ongoing gains in global equity markets this morning in the wake of favorable corporate earnings flow yesterday and also in the wake of two favorable US economic reports on Tuesday, would seem to leave the bear camp with a slight edge today. We also have to wonder if an ongoing political shift in the US is serving to tamp down ideas that financial reform will not end up stripping the banks of their trading capacity.

Seeing the banks stripped of holding anything but US Treasuries, might have contributed to the 5 point rally off the December lows, but until there is a distinct shift in the tone of the financial reform effort, one shouldn’t expect Treasuries to begin to fall off that angle. However, Treasuries have to be a little concerned about the Chinese scaling back their US holdings, but apparently inflation expectations have been tamped down in the last 24 hours by comments from the Minnesota Fed president yesterday and also because of BOE statements that suggested inflation might only be set to come back up to target levels if quantitative easing was left in place longer than necessary. With a surprise increase in UK unemployment readings seen overnight, that news probably serves to temper the recent improvement of global economic sentiment but higher US equity market opening indications has certainly left the bears in the Treasuries with a bit of an early edge. However, the key feature of the Wednesday trading session should still be the US housing starts and permits data, which we think will show mixed results. Most expectations call for a rise in housing starts, but we think that the permits reading (which can be a leading indictor) will come in softer than expected and that could give rise to a March bond rally back to even number resistance of 118-00, with a similar upside potential in March Notes initially pegged at 118-10.

We then suspect the Treasury market will be knocked back a bit in the wake of the second set of scheduled US economic readings (Industrial Production/Capacity Utilization) as the expectations for those figures mostly call for gains in both of those readings. In the end, unless the US housing permits are “headline” weak, we suspect that rallies in Treasuries should still be sold on a short term basis but traders do need to be aware of a speech due just ahead of mid session from the Philly Fed President. At least for the time being, flight to quality interest in US Treasuries looks to be on the wane and that should make it difficult for the markets to take out and sustain above this week’s highs on the charts.

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Treasuries seem to be capped off just under last week’s highs on the charts, but we suspect that the market will garner some support off the 3 Year Note auction results at mid session today. However, while investors have shown the most interest in the shorter end of the yield curve in recent auctions, the heavy amount of supply lumped into first tranche of supply today could reduce the potential of a distinctly favorable result. With the Dow falling below the psychological 10,000 level yesterday and seemingly set to remain below that level into the opening this morning, we suspect that the action in the equity markets is generally destined to provide some minor indirect pressure to Treasury prices in the early going today. Yesterday a Fed member suggested that they might begin some asset sales in the 2nd half of 2010, but he also added that the Fed might not begin to tighten until after beginning the asset sales. Therefore, the Fed seems to have indicated that rates are likely to remain on hold through mid year.

With the economic report slate today somewhat thin (except for a Wholesale trade release) there shouldn’t be that much fresh news on the condition of the US economy. At least ahead of the auction, the March bonds look to have resistance up at 119-11, with similar early resistance in March Notes ahead of the auction seen at 118-23. Even though the Treasuries might show some initial weakness this morning we suspect that overall conditions are going to continue to favor the bull camp and that the auction results will add to the bullish tilt later on in the session. Apparently some early recovery bounce type action in US equities is applying some initial pressure to Treasury prices, but we would think that March bonds will find some buying interest around the 118-22 level, with a similar buying support level in March Notes seen around 118-11. In fact, despite the attempt to recover in the equity markets, the Press and trade still see to be fostering concerns toward EU debt. With a German CPI reading overnight actually posting a decline of 0.6%, it would certainly seem like economic activity in Germany remains suspect and that could indirectly provide a minor amount of support to US Treasuries.

Even if the US equity market action promotes bearishness toward Treasury prices early, we suspect that the trade will wait until after the results of the Treasury auction is known at mid session, before they make a definitive play.

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After forging a distinct rally attempt and managing to reach the highest level since December 18th yesterday, Treasury prices fell back and March bonds ended up finishing near a collection of closes around the 118-06 level. It must have been an interesting Fed meeting kick off yesterday with Congress wrangling over the confirmation of the Fed Chairman. Supposedly Bernanke has the Senate votes to be confirmed, with that vote expected to come on Thursday. However, members of Congress have to make up for their lack of attention to the beginning of the sub-prime crisis, by making a public scene and blaming Fed leadership. Too bad the FOMC isn’t allowed to re-confirm members of Congress and in the process they could grill the legislators on their efforts to grow Ginnie and Freddie into reckless out of control lending machines. In the end, Bernanke seems to have the support of the White House and enough of the Senate to be confirmed. While the Treasury Bonds saw a rally of roughly 9 ticks, with Notes only gaining 5 ticks in the wake of the first leg of US Treasury auctions on Tuesday, the market will be presented with another $42 billion in 5 Year note supply today and that promises to lend some minimal support to Treasury prices around mid session. With the US State of the Union speech anxiously awaited tonight, the Treasury market might be locked into a tighter than normal trading range, as there are hopes that the US will reign in spending, but there would also seem to be the need to provide even more stimulus spending! Just as an addict promises to quit after the next fix, the US will probably look for another jobs program or for a slimmed down health care reform package, or for a clean air program and then it will clean up its spending act. In the mean time, overnight equity prices showed periodic weakness and that seemed to be providing a bit of a flight to quality bid to bonds and notes this morning. In addition to a new Home sales report, that is expected to show a minor gain, the Treasury trade will also be confronted with testimony from Treasury Secretary Geithner on the AIG payments. While the hearings might not go that well for Geithner, we doubt that the testimony will serve to derail US Treasuries. Once again Congress will try to nit pick Geithner in hindsight for moves that were made under extreme pressure but we doubt that anything will happen beyond the Treasury Secretary losing some favor within the Obama Administration. In short, after some minor weakness, in the face of the New Homes sales figures and the AIG testimony, we suspect that Treasury prices will attempt to climb into and through the mid day auction results and then catch a slight additional bid into the FOMC statement release window at 1:15 cst. We have to think that the Fed is going to remain totally on hold, with little if any change in the statement, as the recent numbers have softened and noted weakness in equities has probably served to dent consumer and investor sentiment. Therefore, we would expect a slightly positive late morning and afternoon bias, but we also suspect that Treasury prices will find it difficult to move outside of this week’s trading range, until the market learns what other major institutions might be turned upside down by the governments ongoing overhaul addiction.

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The Treasury market flared last week in the wake of a much stronger than expected series of US Treasury auctions and in the face of a partial break down in the equity markets. With no auction supply concerns this week, an indirect tightening move seen by the Chinese overnight and ongoing weakness in equities, that should leave the bear camp with the near term edge. The market will see a Treasury Capital Flows report this morning and that could offer up some surprises, as we think the foreign contribution to the US auctions is beginning to taper off. However, the Treasury Cap Flows report might not be given as much attention as the NAHB report at mid session, unless the flows report offers up a distinct surprise. While the NAHB Index is generally expected to rise, we doubt that the trade will be noticeably undermined as a result of that report. With the overnight economic news from the Euro zone soft and the Chinese moving to raise a discount yield on 1 year paper, it is possible that the Treasury trade will see the overall macro economic tilt as somewhat soft. In fact, with the Bankruptcy filing of JAL overnight and the trade anticipating the Citigroup earnings report early today, there could have been a conclusively bearish early tilt in the equity markets. However, Treasury prices only slightly lower in the face of the overnight news and that would seem to suggest that prices last week were in some way slightly overdone. The January 12th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 93,176 contracts, with the Non-reportable position net short 41,616 contracts, and that made the “combined” spec and fund position net short 134,792 contracts as of early last week. Similarly the January 12th Commitment of Traders with Options report for US Treasury 10 Year Notes showed the Non-commercial position to be net short 211,515 contracts, with the Non-reportable position net short 46,140 contracts, and that made the “combined” spec and fund position net short 257,655 contracts as of early last week. Therefore, the Treasury market was certainly capable of some technical short covering but with the Bond market at times last week, sitting as much as 3 1/2 points above the December lows, one can hardly suggest that more short covering is needed in the market. However, given the pre-existing bullish bias, in the wake of the sufficient auction action last week, anything disappointing from Citigroup and or from the equity markets could leave the path of least resistance pointing upward in Treasuries. Countervailing the minimal upward bias is the fact that UK inflation readings in December, managed the largest annual inflation jump in roughly 31 years! We will give the market some time this morning to firm up, but the failure to firm in the face of Chinese tightening and weak equities, could be seen as a sign that the short covering action has run its course and that fresh outright buyers aren’t exactly present in large numbers. Overall, expect a tight trading range unless the Treasury Capital Flows report provides evidence of a distinct retrenchment of foreign players.

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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.

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In this update, we will concentrate on a few longer-term strategies for key markets for the coming year. All of these strategies are designed with limited risk and to the trader stay in the positions for an extended period, to be able to take advantage of longer-term nature of these moves. The presence of widespread global recovery expectations is going to facilitate even more fund interest in commodities into 2010. Periodic attempts to reign in inflation through the use of rising interest rates could cause the equity markets to chop around in 2010, as opposed to the very impressive uptrend pattern they exhibited in 2009. With rising rates also serving to make bonds and fixed income investments less desirable, commodities might become even more attractive in 2010. Therefore, traders should look to historically cheap commodities, to commodities with strong demand, and especially to markets that are small enough to be dramatically impacted by an influx of capital.

In looking forward, we see a major slide beginning in the US Bonds and the Yen, with the prospect of significant gains in orange juice, corn and cattle. We expect some rather significant price swings in these markets over the next 9 to 12 months. In general we are operating under the assumption that the global economy is set to recover, but we also think that US growth could end up being a little stronger than the anemic predictions that were being embraced by many markets as recently as the end of October.

In addition to the prospects of fundamental changes, we also are seeing some classic technical signals calling for big moves in the coming months. We are using strategies designed to

1. provide lower, defined costs,
2. offer leverage potential and
3. present an extended time horizon for the “big picture” developments to unfold.

Furthermore, by utilizing multiple units of the enclosed strategies, we hope to capitalize on partial moves by banking profits on a portion of each trade while holding the balance of the positions for an extended period. The idea here is that it would help us increase our resolve to hold out for an even bigger reward.

We admit that these strategies might have some flaws, the most prevalent being a lack of liquidity that could make them difficult to execute. Given their out-of-the-money nature, it could take significant moves for them to turn profitable, and without a significant move in the right direction it could be difficult to exit the trades. On the plus side, the trades generally have a defined risk, and in the event that our predictions are correct, the out-of-the-money options should become more liquid. Finally, one should not forget the potential benefit of holding a multiple positions in the face of favorable, big-picture market reactions.

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Treasury prices have managed a bounce off the prior session’s lows but with the March bonds remaining below the 118-00 level, it would seem like a bearish tone generally remains in place into the new trading week. With international credit risks seemingly on the wane, in the wake of a Dubai bailout announcement overnight, and equity prices also showing initial strength today, the bear camp certainly has more news in its court than the bull camp. In fact, with the US economic report slate empty today, it might be difficult for the trade to revive macro economic concerns again and in turn lift Treasury prices markedly. However, Treasury prices were able to throw off the early bout of selling, on a bit of bargain hunting buying interest that seemed to be sparked by slightly higher yields.

While the December 8th Commitment of Traders with Options report for U.S. Treasury Bonds showed the Non-commercial position to be net short 82,283 contracts, with the Non-reportable position net long 12,614 contracts, that made the “combined” spec and fund position net short 69,669 contracts as of early last week but that positioning is probably understated due to the slide in prices since that report was measured. The 10 Year Notes showed a “combined” spec and fund position that was net short 20,579 contracts and we assume that positioning is also moderately understated. In looking ahead to the week, the market will be presented with a series of inflation reports early on and then an FOMC meeting statement later on in the week.

In the event that Treasury prices are sitting near a downside breakout point on the charts, into the FOMC meeting statement later this week, we would suggest that the trade will have some form of policy statement change factored into prices. At least in the near term, March Bonds have somewhat solid support down at 117-04, with little in the way of resistance seen until the 118-16. Critical support in March Notes is seen at 117-13 today, with little in the way of resistance seen until the 118-05 level. With President Obama meeting US Bank executives today in what is thought to be an effort to spark increased lending activity, it is possible that US Banks will be less inclined to hold money in Treasuries and that in conjunction with residual gains in equity prices ahead, would seem to suggest that both bond and note prices are poised to make lower lows in the weeks ahead.

In fact, without a resurfacing of international credit concerns, the bull camp might find it extremely difficult to consistently control the market. Interestingly enough, longer term up trend channel support is seen in the March bonds just below the market at 117-06 today, with similar up trend channel support in March Notes seen pretty close to the market at 117-15.