Tuesday, February 17, 2009

Treasury Tuesdays

Click for a larger image

Notice the following on the IEF (7-10 year Treasury) chart:

-- Prices have been in a clear downtrend since the end of last year

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices have been using the 10 and 20 day SMA as upside resistance for the last two months

-- Price have rallied to two key Fibonacci levels and then fallen back

Then there is the fundamental picture:

Time and again the U.S. Treasurys market has escaped the correction many believe is inevitable for a market that is so buoyant, it could be mistaken for a bubble. This week, it may not be so fortunate.

Prices of government bonds started to fall Friday, ahead of the vote by the House of Representatives that approved the nearly $800 billion stimulus package. This decline could be the beginning of the capitulation the market has been bracing for since the administration of President Barack Obama took over, with promises of a recession-era boom in government spending.

No sooner had lawmakers reached a compromise on this spending program than yet another began to take shape, this time to help homeowners avoid default on their mortgages. Though the dimensions of this package are unclear -- details are expected Wednesday -- the bottom line is unequivocal. Each new rescue plan signals an expansion of government borrowing and more bonds flooding the market, which absorbed a record $67 billion last week.

It may seem a wonder that Treasurys prices have held up so well against this onslaught. Last week's auctions of three-year, 10-year and 30-year paper proved that investor demand for supposedly risk-free U.S. securities remains an easy match for the government's funding needs.

Particularly surprising for some was the frank display of foreign investor appetite. Indirect bids, widely cited as a measure of offshore demand, were well above average for each, ranging from 34% for the 30-year to almost 45% for the short bond.

Those expecting a reversal of bond prices had reckoned without the financial markets' harsh verdict on the latest program to aid banks. Treasury Secretary Timothy Geithner's Financial Stability Plan was too short on detail to convince investors that a recovery for the sector is at hand. Sharp declines on stock indexes contributed to the rush to safer positions in Treasurys.

Friday's trade wiped out those gains in the 30-year bond, which was sold in large volumes by mortgage originators as part of energetic hedging activity ahead of the three-day Presidents Day weekend.

There is a ton of supply coming to market right now.