Thursday, July 9, 2015

It’s the Economy not Greece…until Friday Afternoon

Treasuries are lower as imagined (‘Bund, like Treasuries are Ready to ‘Chill’ on Greece for Now’) with time remaining before we need be overly concerned with the next Greece ‘end game’ on Sunday night.  Between now and mid-day tomorrow (Friday, July 10), there may be some sellers initiated positioning that gets caught offside.  For now, there is a lack of full delta short positions in the market and only a handful recently interested enough to position with lower delta option strategies.  As such, there appears room for further price declines as the marginal participant is still long.    

Price action today and yesterday appears to be forming a bearish engulfing pattern that could help carry prices lower still this afternoon and overnight to test support in TY toward the 50 day moving average (126-11+) and possibly the opening level on July 1 at 125-31.  As is, Treasuries are still a long way above the low prior to the June FOMC meeting.  Today’s retreating price action seems to be connected with a greater acceptance that economic growth and employment, as well as inflation prospects will provide the Fed with reason to move forward with normalizing policy this year…possibly as soon as September.  Largely absent over the last weeks, Treasury and Eurodollar futures priced too low the odds for Fed normalization.

While others might argue that it has been wholly a vacillation in risk preference that has driven fixed income prices lately, movement in gold and oil in the last week seems to verify my assumptions about economic growth prospects as having been a driving force of late.     

In the absence of immediate geographic concerns we should expect Eurodollars and Treasury futures to continue to price greater odds for Fed normalization this year.  At or near ‘Grexit’ events, expect heightened concerns to be priced and all else equal, higher Treasury and Eurodollar prices to temporarily prevail.  There appears at least another 12 hours before those concerns are more strongly priced. 


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