Monday, December 5, 2016

Treasury Bears Exiting...Voting With Their Feet



After the biggest monthly decline 7 years in November, US Treasuries are recovering with few thus far willing to see the reverse.  Price action coming into the employment report seemed to indicate that traders were not willing to bet excessively that the report would be as strong as widely expected.  Following a relatively strong payroll report with a large drop to 4.6% in the U3 unemployment rate and payroll growth near consensus expectations, Treasuries advanced modestly, recovering further from Thursday’s pre-employment report lows. 


Sellers re-emerged today following an as expected ‘no-vote’ in Italy.  The tendency to discount the Italy vote expected outcome was strong and the reverse from ‘risk-off’ price action following the results was quick.  One might imagine that traders having seen a 3 session reverse of the post Brexit vote and a 3 hour reverse of the Trump presidential vote, moved even quicker to reverse this latest ‘risk-off’ event. 

However, the extent by which Treasuries had priced inflation and greater prospects for economic growth, which would be expected to bring a somewhat more active FOMC,  had been too sharp, too consistent and too reaching for it not to reverse at recent levels.   There were/are additional signs of discord in the prolonged expressions of ‘risk-on’ positioning.  Gold too has seen an important test at 1161 and appears to be holding on a second attempt at this support level.  The dollar found buyers early today, but has come well lower, damaging further the already somewhat bearish short term technical conditions. 

We would note that using our candlestick analysis, many of the US fixed income contracts formed bullish enfulfing patterns as a result of trade on Thursday/Friday.  That bullish reversal pattern may be confirmed with higher settlements today.  Currently, many of the futures contracts have formed an additional bullish candlestick pattern know as a bullish hammer as a result of trade thus far today. 

Together these technical developments along with the excessive string of uninterrupted new lows during the declining price action period give us greater confidences than we shared prior to the employment report that higher Eurodollar and Treasury futures prices should be expected.  The extent of these gains will be somewhat limited by the nearness of the upcoming FOMC meeting, but there is clearly room for some significant short covering between now and then.