Friday, April 10, 2015
Treasuries Bulls Taking a Rest
Like most others, I was impressed with the bullish advance following the employment report last Friday. That report was of course the weakest in over a year and brought concerns that the one bright spot for U.S. domestic growth had finally turned for the worse. Of course, the report also brought more into line the recent employment conditions with the weaker production data of the last quarter.
More impressive still was that the gains from last Friday were not held. Instead, they were immediately reversed. The bullish contingent had won serious ground over the month, pushing 10yr treasury yields from 2.25%, down below 1.90% following the prior strong February employment report. Why did the bullish crowd decide not to support their positions after last Friday’s report?
It may be for reasons already mentioned. The bullish contingent as well saw the inconsistency between production and employment data and may have sensed that the reconciliation would come (eventually) with a weaker employment report. Treasury bulls, attuned to weak growth in Europe, Japan and China, West Coast port strikes and severe winter weather may not have discounted these developments as strongly as Treasury bears did, but have not dismissed them entirely. They instead chose to concentrate on the ‘elephant in the room’. Now that the elephant is gone, they are willing to reduce their bullish positions.
Technically, TYM gave up more than half of April 3rd gains on Monday. The reverse happened near the mid-January and early-February highs. The bearish implication of the Friday/Monday reverse was confirmed in Tuesday’s trade. Yesterday, the contract broke lower even on the approach of the weak 30yr auction and settled at its lowest level since March 30. Treasury futures all saw open interest gains as a result of trade on Thursday (TU +10K, FV +29K, TY +14K, US +9K and WN +6K). This gives indication that the bears were serious in their selling yesterday and took home more positions.
Positions, technical conditions and economic development suggest that we should be ‘leaning into’ today’s bullish up-tic, expecting that come next week, longs will continue to liquidate positions and momentum traders will climb into any bearish progress. At this stage, a reverse of 50% of last month’s advance appears likely, indicating TYM5 could move back to or below 128-00.