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.
Click here to download complete report in pdf format (Professional Edition Subscribers) including 27 pages of charts and clear, cutting edge analysis that you can use to gain an edge in the market. Try the Professional Edition risk free for thirty days. If, within that time, you don’t find the information useful, I will give you a full refund. It’s that simple. 30 day risk free trial for new subscribers. Click here for more information.
Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, along with regular updates of the US housing market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Try it risk free for 30 days. Don’t miss another day. Get the research and analysis you need to understand these critical forces. Be prepared. Stay ahead of the herd. Click this link and begin your risk free trial NOW!
Enter your email address in the form to receive email notification when Professional Edition reports are posted.
We may be skating on very thin ice here, but the weight of the evidence still supports a weak bull case for the near to intermediate term. So I’m adding buy picks on the chart pick list and adjusting trailing stops to account for the risk.
These reports are not investment advice. They are for informational purposes, for a broad audience of investment and trading professionals, and other experienced investors and traders. Chart pick performance changes week to week and past performance may not indicate future results, as you know. Trading involves risk, and these reports assume that you understand those risks and manage them according to your tolerance.