Tuesday, April 5, 2011

Treasury Tuesdays

The chart above is a long-term (4+ year chart) and shows that Treasuries have been rallying for the better part of four years. This period covers the contraction caused by the recession when Treasuries were the beneficiary of the safety bid and the first part of the current expansion. However, with more and more talk of the Fed at minimum getting out to QEII, Treasuries are less attractive, explaining recent selling pressure.

Notice that Treasury prices (weekly bars) are currently right at 50% Fibonacci levels.

In the last week, we've seen Treasury prices sell-off hard, moving through resistance and continuing in their downward sloping pennant pattern. For a period, Treasury prices were experiencing their longest down period since 1999. While Treasuries caught a safety bid due to Middle East tensions, the sell-off indicates traders are losing their fear. In addition, as it becomes more and more obvious that the Fed is leaving the market, traders are seeing the exit of a very large bid, adding further downward pressure in the market.

Going forward, I would expect Treasuries to retest the 200 day EMA, perhaps move a touch higher, but then resume their downward trend. The Fed is getting out of the market and the economic numbers on balance are indicating the recovery is self-sustaining (although possibly slowing down). In addition, we have heard more hawkishness from the Fed of late.