Interest Rates: A Temporary Shift in Favor of the Bear Camp
In retrospect, the treasury market came under significant pressure yesterday following news that the EU was planning a joint bond issuance of $1 trillion as that creates supply competition for US debt. The ECB indicated the bond offering would help to build the European energy and defense industries. Today’s weakness is likely the result of risk on sentiment in equities, signs that China will continue to buy oil from Russia (that delays financial disaster in Russia), the decision by Russia to allow for exit corridors from the Ukraine and from signs of “hot” inflation readings from China. On the other hand, seeing the Chinese continue to buy energy from Russia could make China a pariah in the international community and create some uncertainty. Yesterday, the treasury market showed a slight decline in the wake of a 3 year note auction and we see a similar reaction to today’s 10 year note auction. While the US scheduled report slate today offers up the job openings and labor turnover report (JOLTS) we see standard economic information as secondary to other price determining forces. While an initial decline in crude oil prices provides some support to treasuries the trade doubts oil prices will remain down for long. The North American session will start out with a weekly private survey of mortgage applications, followed by the January job openings and labor turnover (JOLTS) survey which is expected to have a minimal downtick from December's 10.925 million reading. Earnings announcements will include Campbell Soup before the Wall Street opening.
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MARKET IDEAS
Yesterday prices were pressured by the announcement of a very large bond offering from Europe and today the treasury markets are under pressure from risk on in equities and signs of declining flight to quality concerns in other markets. From a technical perspective, a 4-day low in June bonds projects a slide down to 155-29. Given the mess in the Ukraine it could be dangerous to press the short side of bonds for what we think is a limited return. Next lower support in June bonds is seen at 155-19, with initial support in June notes seen at the bottom of a recent gap at 126-20.