Tuesday, October 21, 2014

Treasury Longs Still In Hiding

The JPM Treasury Client Survey shows a not so surprising jump on the number of neutrals (+11 ‘all’; +17 ‘active’) following last week’s volatile market performance that increasingly looks to have included a ‘cyclical yield low’.  Of surprise was that more of the neutrals came from prior longs than shorts.  There are again only 8% in the ‘active client’ status marked as long; surprising following the long series of similar marks - the longest in the series history. 

Late in September we reviewed this series and noted the growing prospects for further bullish Treasury advance.  One might wonder if the survey’s again low level of ‘active client’ willingness to hold long Treasury positions is suggestive of a market that has more room for lower yields.  At this stage, we feel that the shock of market volatility prompted active longs as well as shorts to the sidelines.  The price action surrounding the recent Treasury yield low suggests a greater chance for higher yields forthcoming and its further likely any constructive economic news will be afforded greater importance.

More immediately, price action yesterday provided a rather brief Treasury blip that took prices just above mid-range from Friday.  We should note that the settlement on Friday was below the ‘mid’ from Wednesday, helping to discount any bullish implications for the higher close that day.  Of course, the Wednesday and Thursday sessions were individually bearish ‘shooting stars’ and in combination formed a bearish ‘harami’. 

While there is still room for considerable volatility until such time where a steadier consensus view emerges as to the timing for Fed policy lift-off date and subsequent pace of accommodation removal, we strongly suspect that any near term exaggerated price movement will favor higher yields while grinding market activity would accompany any bullish advance.    

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