The Treasury market settled down this week with 10 year Treasury yields hovering above the critical 2.20% that would signal a resumption of the panic, but below the line at 2.30, a breakout of which would signal an upside reversal. The market faced heavy supply and took it in stride this week, with help from foreign central banks, but the big test will come at the end of the month when that supply will be settled. Furthermore there’s reason to think that the supply problem will only grow in September.
While the indirect bid at the Treasury auctions remains about 20% below last year’s level, foreign central banks have increased their buying in recent weeks to 25-30% of new Treasury supply each week. That had been contributing to the short squeeze/buying panic in longer term Treasuries and it is helping to stabilize stocks. Indirect bids at this week’s auctions, indicative of FCB buying, were stronger than at the last rounds of the same types of paper.
The up phase of the FCB short term buying cycle is due to end now. That will remove a big prop from the Treasuries, and could mark the end of the rally. If this is the peak of their buying cycle it would be the lowest level of peak buying in at least the past 4 years.
All of this may be moot come Monday. If Irene runs the coast of New Jersey and NYC takes a direct hit, it could bankrupt the insurance industry. What will the mad scientist Bernankenstein do then? Maybe he has a high school term paper for this problem too. Just what we need.
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