U.S. Treasury Bonds Break Below Short-term Support

By: Levente_Mady

The bond market gave up a major support level 2 weeks ago as the 10 Year Treasury Note moved decisively through 3%.  Last week the bond market followed through with yields rising and prices falling further.  The stocks for bonds switch also continued unabated.  The yield curve also broke out of its trading range around 200 basis points to steepen toward the 230 level.  Long term rates rose from 2.5% just before year end to 4.27% as of last weekend.  That is a 71% rise in a little over 4 months.  That is about double the measly 35% rise in the stock market.  The record debt to GDP level maybe changing in its composition but it is not going away.  Any “green-shoot” that might be fixing to sprout will be nipped in the bud by rising yields.

The main driver behind the further deterioration of the bond market was continued supply concerns.  Ironically last week’s Treasury Note and Bond auctions were very well received in terms of the level of interest.  The number of bids received for each bond sold ranged between 2.66 times for the 3 Year Note and 2.14 times for the 30 Year Bond.  Those numbers were at the high end of the recent range and nowhere close to the 1 to 1 ratio where the Treasury would have to be concerned about failed auctions.  In addition to the decent level of general interest, demand remains strong by indirect bidders – i.e. foreign Central Banks.  All the auctions last week had participations in excess of 30% by this sector.  At this juncture, all the fretting about waning foreign interest in the US Treasury market seems to be unfounded.  The problem with the recent auctions was the lack of aggressive bidding.  In other words, there were plenty of buyers of Treasuries out there, but those buyers demanded (and got) a substantial discount on their new bond purchases.

NOTEWORTHY:  The economic calendar was a mixed bag last week.  The week started on a positive note with Construction Spending showing a 0.3% increase, while Pending Home Sales increased 3.2% in March.  The ISM Services Survey moved up 3 points to 43.7, which indicates that this sector is still forecasted to contract, but at a lesser rate.  Weekly Initial Jobless Claims dropped 34k lower to 601k, while Continued Benefits continue to climb relentlessly.  The consumer is still about 70% of the US economy and the latest data on that front is still far from than stellar.  Consumer Credit declined $11.1Billion in March after dropping $8.1Billion in February.  This is not a widely watched number by mainstream, but I think it is one of the top 3 data series as it brings into focus the massive deleveraging process that is happening at consumer level.  Consumer Credit dropped from a 6% annual growth rate less that a year ago to flat through March.  At this clip, it could very easily be declining at a 5-10% clip by mid-summer.  No “green-shoots” on this front, none!  The most watched monthly Employment report was a piece of work. 

The most esteemed Bloomberg news headline trumpeted the following: U.S. Loses 539,000 Jobs, Fewer Than Forecast, in Sign Economy Stabilizing.  That is simply beyond me!  The US economy needs to create close to 200k jobs per month for the economy to stand still and just to keep pace with demographic changes.  Perhaps one (or a few) of my readers could help me understand how THREE QUARTERS OF A MILLION jobs below flat trend can show that the economy is stabilizing???  I could spend another page or two listing a number of other items that stank about that report, including the headline Unemployment rate rising to 8.9% - the highest since 1983 and still skyrocketing.  In Canada, the Employment report was an entirely different story with 36k jobs created in April.  While the positive data in BC was most likely skewed by the upcoming election, all the job gains were in the self-employed sector.  It remains to be seen if this was a one month blip or the start of a new trend.  This week’s schedule will include the Trade Balance data, the Retail Sales report, the inflation reports as well as Industrial Production and Capacity Utilization data.

INFLUENCES:  Trader sentiment surveys moved lower again this week.  While longer term this is supportive, in the short term it has more room to move before it becomes overdone.  The Commitment of Traders reports showed that Commercial traders were net long 371k 10 year Treasury Note futures equivalents – an increase of 37k from last week.  This is somewhat supportive.  It is also telling us that the smart money is increasing their long positions as bonds remain under pressure.  Seasonal influences are bottoming here.  The technical picture is broken as the market cut through support like hot knife through butter at 124 2 weeks ago and remained under pressure since then.  The Long bond future did dip to the 120 area that I was expecting last week.  As per last week’s comments, I am starting to recommend long exposure to the Treasury bond market at this level.

RATES:  The US Long Bond future faded a couple of points to 120-10, while the yield on the US 10-year note increased 14 basis points to 3.29% during the past week.  The Canadian 10 year yield was 6 basis points higher at 3.16%.  The US yield curve was steeper as the difference between the 2 year and 10 year Treasury yield increased 11 basis points to 231.

BOTTOM LINE:  Bond yields increased again, while the yield curve was steeper last week.  The fundamental backdrop remains weak, which is supportive for bonds.  Trader sentiment continues to move toward bearish territory; Commitment of Traders positions are supportive and seasonal influences are becoming neutral.  My bond market view is starting to lean positive.

By Levente Mady
lmady@mfglobal.com
www.mfglobal.ca

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