Extended excerpt from the Executive Summary.
The Treasury had a very light calendar and easy skating last week, but the calendar will be heavier in the week ahead, with notes and bonds being offered in addition to the regular weekly bill auctions. The notes and bonds will settle on Friday. It’s unusual for them to settle the same week they are auctioned, but the net new paper offered will amount to only $32 billion, and the Fed should provide the cash for virtually all of that with its usual mid month settlement of its MBS purchases from Primary Dealers. This supply should not impact the markets this week.
The uptick in yields and rally in stocks last week was not a surprise:
5/25/12 With no new long term supply offered next week, once the May 31 settlement is put to bed, the pressure on the market will ease until mid month at least. With nothing to sell, the Primary Dealers and their number one client, the US Government, will not be adverse to a small uptick in Treasury yields coupled with stocks coming off the cliff ledge and moving higher.
Treasury yields had been driven down by the panic out of Europe. There were hints of a turn last week, including the technical action on the yield chart, as well as a small outflow from bond mutual funds for the first time since last October.
Treasuries exceeded their short term technical target, and yields found major support lines in the 1.50 area, so this may have been the beginning of a bottoming process that could lead to higher yields over the next 6-9 months. Treasuries are at record long term technical extensions, and so are Primary Dealer long positions, so this turn could be significant. It’s too soon to tell if this is the “big one.”
FCBs and commercial banks have maintained modest levels of buying. As long as that continues, the Treasury market should get a bid, but if the European panic should wane for any reason, like the Spain bank bailout deal unfolding this weekend, then the return to “risk on” should continue, with money coming out of Treasuries and stocks getting the benefit.
Federal revenues have been picking up again in the past few weeks. That should shrink the deficit and keep new supply at a level no greater than forecast, and possibly a little less. Economic data could surprise to the upside.
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