Wednesday, July 6, 2011

Treasury Tuesdays

Last week, I wrote the following about the Treasury market:
The fact that the long end of the curve didn't follow the belly higher is interesting. That and the continued deterioration in the TLT's technicals tells me the long end of the curve is selling off -- or at least holding even for awhile. I'm not convinced the IEFs are going to maintain a strong rally here, largely because the long-end of the curve is not following through. As such, I don't see the IEFs current move higher continuing. That would analysis would change if the TLTs break higher to new levels.
The Treasury market sold-ff last week. Yesterday, the WSJ today reported on the sell-off thusly:
The three-month run-up in Treasurys prices may be running out of steam—if the market isn't poised for an outright reversal. The longest selling streak in months has persuaded some analysts that yields have reached the bottom.

U.S. Treasury debt has sold off after a set of weak government debt auctions in the past five sessions—and has done so on notable trading volume. Until that point, prices had rallied since early April, fueled by a drumbeat of soft U.S. economic data and alarming headlines out of Europe.

On June 27, the benchmark yield touched a 2011 low of 2.842%. It has since catapulted above 3.20%. The 0.342 percentage-point jump in the past five sessions is the largest weekly advance since August 2009, prompting some analysts to suspect the bull run may be fizzling out. Bond yields move inversely to prices.

Goldman Sachs Group chief interest-rate strategist Francesco Garzarelli, on Thursday said he believed the Treasurys rally is over, as U.S. economic activity is expected to pick up in the second half of the year. He isn't the only one.

Barring any bad news from Europe, "we suspect the bottom is in," said Eric Green, chief U.S. rates strategist at TD Securities. He specifically pointed to the past months of weak data giving way to stronger economic growth and more attention to inflation.

Chris Ahrens, interest-rate strategist at UBS, says he sees yields pushing higher. "After a steady downward path since early April, it marks an important moment for the bond markets," he said. "The pressure is going to be on data to prove the more constructive [economic] scenario."

I'm not sold on the second half recovery story yet; although the recent action in the equity, copper and bond markets indicate traders are certainly buying into the argument. I do think the end of QEII is having a pronounced effect as the largest buyer of debt is effectively leaving the market. Let's take a look at the charts:

The 5-minute IEF chart shows the strength of the downtrend over the last 10 days. I've included Fibonacci retracement levels, as I would expect some type of rebound trade this week.

Prices have clearly moved below the 10, 20 and 50 day EMAs on an increase in volume. The 10, and 20 day EMA are both moving lower, and the 10 day EMA has crossed below the 20 day EMA. Prices have broken the upward sloping trend line. I would expect prices to rebound into the 10 or 20 day EMA before continuing their move lower with a price target of the 200 day EMA.

The TLT chart is slightly more bearish, as the 50 day EMA is also moving lower and prices are right below the 200 day EMA. However, notice the drop-off in volume as prices have moved lower these last two days, indicating the market may be using the 200 day EMA as a place to "pause" and catch its breath.

Given the low trading volume and the price action around the 200 day EMA, I'm thinking the TLTs will pause here or rebound into the EMAs. However, I think the IEFs are targeting the 200 day EMA. Given the Fed's departure, I believe the Treasury market is moving lower for the time being.