U.S. Treasury Bonds Short-term Bounce Continues

By: Levente_Mady

The bond market traded up last week. All you little traders out there who have long positions in the bond market, let's all say a big thank you to the Bank of England – which not only lowered their benchmark rate to a new all time low of 0.50%, but also loudly trumpeted that they will be in the market buying long term Gilts (UK Government bonds) in the not too distant future. This announcement caused a close to 50 basis point rally in the 10 year Gilts and rallies of lesser magnitude in other government bond markets. Supply will be a front page item again in the US as the Treasury will be conducting what used to be a quarterly auction cycle for the second month in a row. The market will need to deal with new supply of 3, 10 and 30 year bonds as the week unfolds.

On the Central Bank front, the Bank of Canada kicked off the week by cutting their rate in half to .50% as expected. They were copied by the Bank of England as mentioned above. To round out the week, the European Central Bank also joined the party by lowering their rate 50 basis points as well to 1.50%. Credit markets appear to be somewhat settled, but most of the financial markets continue to be under all sorts of pressure. My benchmark for stocks is the S&P500 Index. After crashing through the 800 level again halfway through February, we started off the month of March by slicing through the next round number support at 700 like a hot knife through butter. Industry leaders such as General Electric, CitiBank and Alcoa are trading in single digits if not pennies.

The commodity sector remains stuck in the mud and in the currency market the perceived safe haven aspect of the US Dollar is powering that currency to new multi year highs relative to even its well established counterparts such as the Euro, the Pound and the Aussie Dollar. The intensity of this sell-off as measured by the length of time it took for most “risky assets” to crash this far across the board is really un-paralleled. Stocks are now down about 25% during the first 10 weeks of 2009 on top of the 33% decline in 2008. According to the experts, the stock market is a forward looking price mechanism; it will turn around at least 6-9 months before the economy does. Right now the stock market's economic forecast for at least the rest of 2009 looks slightly worse than desperate. In spite of expert forecasts that are handicapping the economy to recover by the second half of 2009 or 2010 the latest, stocks are telling us that there is more severe pain up ahead and the light at the end of the tunnel is not daylight but an on-rushing train, so get out of the way!

NOTEWORTHY: The economic data continues to be disappointing. The week started off on a positive note with Personal Income rising 0.4% in January, while Personal Consumption rose 0.6% during the same time frame. Unfortunately the data is a tad misleading. The Income figure rose mostly because of year end inflation adjustments to government employees and benefit receivers. On the Spending front, this was the first positive month in over half a year. Construction Spending was down 3.3% - way worse than the -1.5% forecast. Pending Home Sales declined 7.7% versus expectations of a 3.5% decline. The ISM Manufacturing Survey was stable at a dismal 35.8 level, while the Service Sector ISM declined a little over a point to 41.6. Auto Sales continue to plunge – the latest figure is now at 9.17 million annualized units – barely over half of the highs of a couple of years ago.

Weekly Jobless Claims dropped 31k to 639k. The monthly Employment Reports was brutal again for February. Non-Farm Payrolls declined 651k last month while the previous months' data was revised down to show an additional 161k jobs lost. The official Unemployment Rate increased from 7.6 to 8.1% while the so called “broad measure” of Unemployment climbed to 14.8%. At this rate even the official unemployment rate will be in double digits before the end of the summer. Over 4 million net jobs have gone down the drain since the beginning of 2008. The Canadian economic data continues to deteriorate as well. Canadian Gross Domestic Product “only” declined at a 3.4% annualized clip during the last Quarter of 2008. Relative to the 6.2% decline in the US and double digit declines in some parts of the world ( Japan among others), that was a stellar performance. Unfortunately that merely means that we have more catching up to do on the downside. Next week's schedule will be highlighted the Retail Sales and Trade Balance reports.

INFLUENCES: Sentiment surveys dropped a little but they are still very much in neutral territory. The Commitment of Traders reports showed that Commercial traders were net long 367k 10 year Treasury Note futures equivalents – an increase of 28k from a week ago. This remains supportive for bonds. Seasonal influences are negative. The technical picture is damaged as the market finally managed to recover a little. 124 was the break-out level for the bond future on the way up. This key support managed to hold so far.

RATES: The US Long Bond future traded up 4 points to 127-09 as the front contract switched over to June from March last week, while the yield on the US 10-year note fell 14 basis points to 2.87%. The Canadian 10 year yield decreased 20 basis points to 2.93%. The US yield curve was flatter as the difference between the 2 year and 10 year Treasury yield decreased to 192 basis points - which is 12 basis points drop from last week.

BOTTOM LINE: Bond yields fell, while the yield curve was flatter last week. The fundamental backdrop remains pathetic, which is supportive for bonds. Trader sentiment is neutral; Commitment of Traders positions are supportive and seasonal influences are negative. My bond market view is: look to sell the bounces to 130; alternatively sell the break of 124 in the March Long Bond futures.

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

The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable.  Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors.  Please carefully consider your financial condition prior to making any investments.

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