A strong upturn in foreign central bank (FCB) cyclical buying of US Treasuries made up for ongoing weakness in commercial bank market participation to propel the markets to strong gains last week. Light Treasury settlements, with a sizable paydown on Thursday also played an important role. The big turn in FCB buying was like the afterburners kicking in, adding fuel to the demand side in an atmosphere of thin supply. We were fully expecting the Treasury paydowns with their usual bullish effects, but the strength of the turn in FCB buying was a little surprising. Based on the indirect bid at last week’s Treasury auctions there’s some question as to whether it continued last week.
This cycle will be critical to the market’s performance both before and after QE ends. This report looks at that and the other critical inputs that will determine when the current rally comes to an end and what will follow.
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