Wednesday, August 26, 2015

Treasury Overnight Gains Evaporate

Even as the settlement prices for Treasury futures were being posted yesterday following a session with an outsized declines (see ‘U.S. Treasury Bond Reverse Big Following 'Double Doji'’), recovery price action was taking place.  The S&P 500 Index, which had earlier reduced gains that nearly retracted all the losses from the prior session, started to fall precipitously.  This equity weakness prompted exaggerated fears and brought buyers back into Treasuries.


As domestic equity prices gave back gains, Treasuries rallied.  Overnight, Treasury prices recovered much of Tuesday’s decline before falling back again.  Currently, Treasury futures are above Tuesday’s closing levels, but well below the overnight highs. 


Technical conditions suggest further weakened Treasury price action forthcoming.   Equity recovery, though slight in China will attract some risk taking and pushing the Fed ‘out the curve’ for an initial policy move excites the few remaining bond vigilantes.  Long end price weakness will work to flatten the Treasury yield curve. 







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