The Treasury market surprisingly showed some weakness yesterday in the face of news that the US planned to undertake more deficit spending to pay for an extension of unemployment insurance. Congress was divided over cutting from the existing budget and simply adding the spending on to the overall debt tally. The GOP was apparently for the extension, but wanted the spending paid for with offsetting budget cuts. In the end, the Treasury market saw the prospect for more debt supply ahead as Congress was expected to pass the measure soon. It is also possible that part of the weakness in the prior trading session was the result of comments from a Chinese economist that China should reduce its exposure to US debt and part of the setback might simply have been the result of a better than expected NYSE stock market opening on Monday morning.

In the end, the market saw a decline in the NAHB Index and the softest reading in that report since the fall of 2009 and that kept the string of softer than expected economic readings intact. With the US housing starts and permits data due out today and the general expectations calling for weakness in those readings, we have to think that the Monday lows and the early morning lows today, are going to be solid support from which the Treasury market will attempt to work higher from.

We do think that this market is prone to becoming overbought and perhaps prone to temporary lapses of buying interest, especially if the Dollar fails again, as that action could chase away some foreign investors. In fact, part of the weakness in the prior trading session might have come from the combination of suspicions that US Treasuries were losing their flight to quality status. However, in the event that the housing permits come in weaker than expectations that could clearly rekindle the talk of a double dip recession and since the semi annual Fed testimony doesn’t start until Wednesday, that could give the double dip crowd 24 hours to lift Treasury prices.

The Permits number could be the key figure in the release schedule today, as that reading tends to be a leading indicator and therefore a bigger than expected decline in permits could be justification for Treasury bond prices to quickly return to their early July highs. Countervailing the upward tilt in Treasury prices is a sense that the European stress tests results at the end of the week are likely to see most financial entities pass. There are some concerns that a European real estate bank might fail the stress test but there are funds available to plug the holes for those in need of cash. In short, the bias is up with close-in support in September Bonds seen at 127-13, with similar support in September Notes seen at 122-29.

As suggested before, there might not be much in the way of resistance this morning if the housing data is softer than expected, but first resistance in September bonds is pegged at 128-13, with resistance in September Notes pegged at 123-13. The bear’s biggest risk today comes in the direct aftermath of the Housing Permits release, but the equity markets and the currency markets don’t seem to be overly sensitive to potential flight to quality issues within the Euro zone today.

This content originated from - The Hightower Report.

While yesterday’s US numbers weren’t that significant they continued to point to what appears to be a slackening US economy and that combined with a rather surprising drop in Canadian building permits date yesterday suggests that all of North America remains mired in a slow down of sorts. Certainly Treasury prices remain in favor, as a flight to quality instrument this morning, as the focus of the trade temporarily shifts back toward the Euro zone in the wake of a flurry of Press coverage on the bank stress tests. The Asian trade in Treasuries was slightly upbeat in the wake of indirect assurances that China wasn’t going to dump US Treasuries in an effort to exert pressure on the US.

Apparently Chinese officials indicated that US Treasuries would remain a key component of Chinese foreign currency controls. In the second quarter of this year, the Chinese reportedly held over $900 billion in US Treasuries, but when one considers the size of the Chinese reserve total of $2.45 trillion, the US holdings aren’t as egregious as many seem to think.

With a slack US economic report slate due out today, the focus of the Treasury market is likely to be on news surrounding the Euro zone bank stress tests, but since those result won’t be made public until February 23rd, the flurry of dialogue around the release of the criterion sent to the Euro banks, is likely to offer little in the way of major direction to US Treasuries and the US Dollar. In fact, with the Dollar showing a bit of strength today and the US equity market showing weakness that would seem to leave the bull camp in Treasuries with an edge to start the US trade today.

Overnight the Royal Bank of Australia indicated that Chinese and Indian economies remained strong and that the Australian economy was showing such strong demand that they would have to respond very soon, but apparently the bright spots in the global economy aren’t going to sway international equity markets, as they are showing a downward bias today.

In the mean time, US Treasuries look to remain within striking distance of their recent highs, with the flow of upcoming numbers potentially serving to lift prices back to their highs. We continue to think that Treasuries are going to be held back because of risk and reward fears associated with purchasing at such low historical yields. Critical support in September bonds is rather close-in at 127-28, with little in the way of resistance seen until the old high of 128-19. Initial support in September T-Notes is seen at 122-20, with little in the way of resistance seen until the old high of 123-01.

At least in the near term, the bull camp looks to retain the edge, as there is no scheduled data to fully alter sentiment and it doesn’t appear as if Washington is on the verge of launching a fresh stimulus effort. About the only way to quickly undermine Treasuries would be to see concerns toward the deficit take precedence over take the fears of slowing in the headlines.

This content originated from - The Hightower Report.

We had some very bad US data again today, but Treasuries weren’t been able to extend sharply to the upside, which leads us to believe that we might be near a major inflection point. While the Euro zone situation isn’t fully solved by any measure, we think their debt contagion has been moved to the back burner and that the slowing of the US economy and its soaring deficit problem might become the media’s new obsession. With the battle lines drawn in the recent G20 meeting, the US is already setting the stage for divergent policy decisions. Perhaps the US leadership was already aware of the vulnerable status of the US economy, but since Washington won’t do standard textbook stimulus efforts the US might be in for a return-to-recession status.

The world has already bid Treasuries into the stratosphere due to their flight to quality status and because of evidence of US slowing. But today the Treasury rally seemed to run out of gas, and the US Dollar appears to have finally caved in. This suggests to us that world sentiment is changing and that further slowing in the US could mean a flight from the US Dollar and from US Treasuries. While gold was down sharply today, the world might have little choice but going to gold because of the almost total absence of a sturdy currency.

It would appear that the US will now be forced to provide more quantitative easing or perhaps even another stimulus package. Since the current US Administration would rather shoot itself in the foot than to utilize standard economic principles in their easing programs, it is possible that US Treasuries and the US Dollar are poised to go from the “penthouse” to the “outhouse.” In our opinion the Democrats won’t/can’t change their principles of only helping those who don’t have a job, are not wealthy and don’t work on Wall Street. This means the Democrats are going to be faced with market action ahead that could insure a house cleaning in the November elections.

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This content originated from - The Hightower Report.

The Treasury market remains near the upside breakout point on the charts this morning, despite the fact that US equities have effectively rejected a downside breakout seen last Friday morning. However, with the German DAX opening higher and the US equity markets also showing positive action early today that could have undermined Treasuries and in turn knocked them back away from the upside breakout point on the charts. However, we suspect that the market is still pent up for a continuation of weak scheduled US data as that has been the pattern for well over a month. Apparently the weekend G20 yielded little in the way of significant developments and that should make the US data a little more important this morning. We suspect that the Personal Income reading will be the main focal point from the Data flow, with Personal Spending and the PCE core Index monthly readings also critical news. However, the PCE Index reading probably won’t show inflation, it is likely to show deflation and that is why that reading could surprise the Treasury trade this morning.

It is probably a little early for the trade to begin considering the week ending US Non farm monthly payroll reading but in the event that today’s rather active flow of data is generally weak, that could turn the focus of the market back toward economics.

The Commitments of Traders Futures and Options report as of June 22nd for U.S. Treasury Bonds showed that Non-Commercial and Non-reportable combined traders held a net short position of 30,549 contracts, with the Note market showing its Non-Commercial and Non-reportable combined traders holding a combined net short position of 157,031 contracts. While the Bond and note position readings are probably understated, due to the rally forged since early last week, the data appears to show that the Treasury market still has technical short covering capacity.

We think the data this morning will either underpin the Treasury market, or begin lifting it back toward the late May highs, as we think the economy is slow enough to prompt Washington to act with additional stimulus measures. In fact, Obama would probably have went along with the G20 “company line” of reducing deficits this weekend, if he wasn’t aware of the slowing pace of the US economy and the need for incumbents to get the economy moving well ahead of the upcoming elections.

We see the market respecting fairly close-in support around the 125-11 level in September Bonds and at 121-15 in September Notes. As for resistance, we suspect that 126-00 will be very weak resistance in September bonds, with the next resistance level seen at the old high of 126-05. Similarly, September Notes have initial resistance at 121-25 this morning. We suspect that Treasuries will see new highs sometime this week.

This content originated from - The Hightower Report.

The Treasury market comes into the last trading day of the week sitting within close proximity to the top of the last months trading range. Apparently the sweep of very weak US economic data this week has become the driving force in the Treasury markets, as the European debt story has been somewhat quiet this week. In fact, economic news from the Euro zone overnight might be applying some minor pressure to Treasury prices early this morning, as April Italian Industrial Production was up rather impressively and the May German PPI report also showed a minor gain. However, in looking back to the US data flow this week, it will be difficult to discount the fear of slowing. In fact, the list of weaker than expected readings was expansive this week, with sharply lower Housing starts and permits, a jump in initial claims and the lowest Philly Fed manufacturing survey reading in 10 months. One might even suggest that Treasuries have clawed back to within 2 points of their highs, without the distinct assistance of fresh headline concerns from the Euro zone.

Surprisingly the flow of weaker US economic readings this week hasn’t undermine US equity prices yet, as sharp declines in equities can sometimes make the economic outlook feel even worse. Since there are no scheduled US data points today, that could take some of the upward bias out of Treasury prices, but seeing UK Borrowing for May come in below expectations, could provide a measure of support from the flight to quality angle once again.

In retrospect, the Treasury market appears to have forged a pretty strong set of consolidation lows around this week’s lows, and to take prices down consistently from current levels, is probably going to require a lot of very favorable economic data and apparently an even longer period of time without concerning Euro zone debt headlines. However, initial support today is pegged at 124-00 in the September bonds, with similar support in September Notes seen at 120-14.

As for the upside the market might not have the momentum today, to forge a new high for the week, which means that yesterday’s highs of 124-18 in September Bonds and 120-27 in September Notes could be effective resistance today. Even news that the US would sell $108 billion in supply next week, failed to undermine Treasuries and that suggests the buyers continue to outnumber the sellers by a decent margin. The lack of scheduled US data today, probably makes the direction of the equity markets, the primary driving force for Treasury prices.

This content originated from - The Hightower Report.

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.

This content originated from - The Hightower Report.

Treasury prices remain in a weak downward bias but instead of entering the session somewhat overbought and vulnerable, the washouts in the prior two sessions should leave the market with a little more technical balance. However, the bear camp is likely to remain in control, as world equity market gains signal an ongoing deflation of flight to quality concerns toward the Euro zone. Apparently the markets are willing to down grade the threat of further contagion news in the short term, as the trade basically discounted news yesterday afternoon that S&P had put the city of Rome’s A+ rating on a negative watch and that yet that story was given little if any attention. The US Treasury’s auction of $31-Bln in 7-year notes yesterday came in with a yield of 2.815%, with a bid to cover ratio of 2.88 to 1, which is better then the recent average. The last 7-yr auction on April 29th came in at a yield of 3.215% and therefore the latest auction cycle is now passed with moderately favorable demand seen in an environment that should have yielded stellar results. In looking forward the market will be presented with Personal Income and Personal Spending readings as well as a PCE reading early today. We doubt that one of the Fed’s pet inflation measures (the PCE) is going to provide anything in the way of bearish fodder for prices this morning, but it is possible that the Personal Income and Spending readings will provide a light but brief measure of pressure to prices. The market will also see some consumer sentiment readings later in the session and those might provide a minor but brief boost in prices. In the current environment, scheduled data will continue to have limited impact, as the future remains highly suspect and dependant on the next iteration from the Euro zone debt saga. In the face of another upside extension in equities, signs of favorable readings from Personal Income and Spending, we suspect that September bonds will see a slide down to and below the 122-00 level, with a similar slide in September Notes seen down to 119-04 initially this morning. However, we would also expect to see a slight positive bid return to the Treasury market ahead of the close today, as the long weekend might prompt some buyers to go out with a longer position just in case a fresh Euro issue finds its way into the headlines. Therefore we see the Treasury market to be the most vulnerable early in the trading session this morning, as the positive spillover from the international equity markets and the initial US numbers weigh on prices. Critical resistance in the September bonds today is seen at 122-18 early, with similar resistance in September Notes pegged at 119-22. If there is a surprise from the data this morning, we suspect that will come in the form of a slightly bigger decline in the Michigan sentiment readings, as the influence of the early May debacle, could be seen in these numbers this morning. Therefore, the bears control looks to be in place until just ahead of 9:00 cst.

This content originated from - The Hightower Report.

The Treasury market remains mostly positive on the charts from the overnight action, as ongoing weakness in Asian equity markets leaves the Euro zone debt crisis on center stage. While the market will see initial and ongoing claims today, we suspect that the market will either ignore data that depicts growth, or it will embrace and rally off the data that shows further evidence of slowing. In other words, the bias is up and it could take some really surprising headline type development to alter the upward track.

Overnight a Chinese economist suggested that China needed to ask the US for special bonds that cushion the Chinese against currency risk or bonds that are cushioned against inflation. With the Chinese steadfastly avoiding a distinct appreciation in their currency, it is possible that they would very much like to see a non currency impacted instrument tailored especially for them. Since the market has already seen requests from China for more TIPS, the desire to insulate their holdings from inflation isn’t a totally new demand. Ordinarily, seeing any change in the flow of Chinese demand for US Treasuries is seen as a negative to prices but in the current condition, the flight to quality bid remains so solid that prices have seen almost no reaction to the latest diversification news.

While the US will announce the size of next week’s auction later today, that news isn’t expected to dent sentiment either as the size is expected to drop a bit, but overall the total auction supply is expected to remain rather lofty. Critical close-in support is seen at 122-22 in June bonds, with a similar support point seen at 122-04 in September Bonds. In June Notes, close-in support is seen at 120-03, with similar support today in September Notes seen at 119-04. As for the upside, we doubt that the market will make a full return to the May highs today, but we do think that is in the cards in the coming trading sessions. However, in the event that a national strike in Greece turns violent that could set the stage for a rise back to the May highs. EU officials have again suggested overnight, that the markets are overreacting to the EU crisis, but so far the US Treasuries think that a large measure of uncertainty and anxiety needs to remain in place, regardless of short sale bans and other artificial limitations on markets.

As further confirmation of the bull tilt in Treasuries, one can make note of the lack of downside action in the wake of positive economic news recently and also the lack of downside in Treasury prices in the face of recovery attempts in the US equity markets. In fact, this market probably wouldn’t show any downside action in the face of news that the auction tally for this next week comes in above the prior week. More than likely confidence readings this morning will favor the bull camp.

This content originated from - The Hightower Report.

The Treasury market sits below the prior session’s highs but still in very close proximity to the recent highs. Despite suggestions from an EU official that there wasn’t a need to propose aid for Spain, the market continues to fear a further deterioration in that situation. With sentiment swirling on Spain, Portugal, Italy and even Ireland, it is clear that the trade is still tossing around rather significant flight to quality issues. While the EU has tried to get the upper hand in the PR effort, with positive comments and assurances overnight, we are not sure that the contagion rumors will be fully put down soon. With US economic numbers stronger than expected and the US scheduled to release details on quarterly refunding later today, one would ordinarily expect Treasury prices to have been under pressure some pressure but in the current situation, classic fundamentals are lost to ongoing flight to quality buying bouts. In fact, Euro zone PMI readings overnight were indicative of growth, but once again those readings are just not being given much credence, as the trade seems to think that an avalanche of debt problems would serve to trip up the global recovery. Therefore, seeing a pick up in a private jobs survey and seeing a rise in the ISM Non-manufacturing Index later today will probably be of little consequence to Treasury prices. In fact, the expectations for the top end of expectations on the US Non Farm payroll reading this Friday, should be enough to scare away some Treasury buyers, but instead the market doesn’t care about the current track of the US economy, as the debt crisis will dictate where the economy ultimately ends up. We do think the market will give some attention to the refunding details from the US later today, but it is possible that trading ranges will simply be narrower today, but the June bonds are likely to respect close-in support at 120-00, with initial resistance pegged at 120-11. Initial support in June Notes is pegged at 118-04, with close-in resistance seen up at 118-10. Pushed into the market today we suspect some minor back and fill selling is possible, as the trade accepts a little more classic economic information into the pricing mechanism, but that allowance could be cut short, if the Euro zone debt headlines offer up anything fresh into the end of the European Wednesday news cycle. In fact, in the face of favorable ISM and Factory orders readings yesterday, the market saw little interest in the short side of the market and we suspect a similar reaction today in the wake of the private jobs survey. We have to wonder if anxiety and rumor dialogue from the Euro zone will serve to dominate all the way through the usually ultra important US monthly Non Farm payroll reading on Friday. Clearly the ebb and flow of the equity market is going to remain another important force for Treasury prices discovery this morning but marginal short covering gains in the equities is hardly cause for a noted setback slide in Treasury prices. In other words, to see anything more than a few ticks of downside in bonds or notes today probably requires a perfect storm of favorable economic readings and perhaps even something more than 8 or 9 points of gains in the S&P.

This content originated from - The Hightower Report.

The Treasury market might have gotten a little ahead of itself with the explosive rally yesterday, as it isn’t a given that US debt is going to consistently benefit from the deterioration in global credit markets. After all, the US still has a massive load of debt to offer to the market, with another tranche of debt in the midst of flowing today and Thursday. In other words, some investors might see Treasuries as a safe harbor, but others might suggest that a global tsunami of foreign debt is likely to lift all boats/yields. If investors have a cornucopia of moderately high debt offerings, it is possible that the US will be forced to pay up along with other deadbeats. It is also possible that increased inflationary concerns could serve to cap off the upside, as the gold market started to show signs of lift yesterday and the ECB’s Stark overnight suggested that high budget deficits might eventually serve to drive up CPI expectations.

Overnight the Aussie central bank expressed concerns of inflation but hinted at leaving interest rates low because of the concerns being thrown off by the EU debt crisis. However, we don’t think the crisis has reached such a severe level that Treasuries will be discounted by inflation, or that they will miss out on further near term flight to quality incidents. We do think that a situation is building where yields are set to rise sharply and prices are set to fall sharply when and if the EU debt crisis is put back under partial control. However, with Greek debt given junk status and Portugal getting pulled under the microscope, it is possible that the next failure target has already been identified. The Germans are likely to pay for their foot dragging with a much bigger overall problem ahead.

In the mean time, we continue to think that scheduled US data is unlikely to have a pronounced impact on Treasury prices, especially after an improvement in confidence was noted in the US and in other countries yesterday and that news was completely lost on the trade. In the action today, the market will see countervailing forces from the 5 Year auction and the FOMC statement. We suspect that the Note auction will be a slight negative to prices, especially given the downward adjustment in yields over the last month, but we also think that traders will be unable to hold prices down into and through the FOMC statement, as the US Fed is clearly set to provide confidence and ongoing low rate promises to the marketplace. In fact, given the high state of flux in the Euro zone and the dovish statements from the Australian central bank overnight we suspect that the Fed could purposely tone down any internal dissent for leaving rates down.

In looking back to the last US inflation data, it is also possible that benign inflation readings will serve to sooth the hawks within the US Fed. In the early morning action, the trade will remain fixated on the news flowing from the European arena, with some minor additional losses in Treasuries seen into the auction results, but we would think the FOMC statement window will result in fresh buying and perhaps a return to the prior session’s high levels. However, the magnitude of the “slide” in equity prices today will be the main arbiter of direction in Treasuries and we don’t think that anything has been done by the EU to simply stop the meltdown after one day. Therefore, it is difficult to suggest that a top has been forged in Treasury prices with the action yesterday.

In short, assume the bias is up unless June bonds manage to violate close-in support of 118-05 in the June contract or June Notes fall back below 117-17 level. Aggressive and short term traders should consider buying weakness into or just ahead of mid session and playing for more debt crisis news later this week.

This content originated from - The Hightower Report.