Investors "flight to safety" has been noted!
Fundamentals
Just when some traders were looking to call a top in the Treasury futures markets, prices for the most active March 10-year note futures have staged a comeback, as continued economic uncertainty -- despite the passage of the massive "stimulus" bill -- and a weakening U.S. stock market have put a bid into the U.S. debt markets. Even more surprising was the fact that the recent rally came in front of the government announcement on the size of the next auction of 2, 5, and 7-year notes. Current estimates are for the auctioning of nearly 100 billion of these mid-term notes in next week's auction. Despite the large amount of government borrowing, it appears that traders are more focused on the continuing weak economic data being announced almost daily. Just yesterday, the Federal Reserve announced that U.S. industrial production for January fell a worse-than-expected 1.8% in January, and they revised December's figures to a 2.4% decline. Capacity utilization fell to its lowest levels in 26 years to 72.0%. This morning we will get the jobless claims figures for last week, with estimates of new claims for unemployment totaling 622,000 last week. There are signs that China, currently the largest holder of U.S. Treasuries, might be looking to cut back on its purchases of U.S. debt and use part of its vast currency reserves (about 1.95 trillion) to purchase strategic assets, such as oil and precious and industrial metals. Until we start to see some stability in the U.S. and world equity markets and some signs that the worst of the economic crisis is behind us, there will continue to be investors moving into Treasuries, hoping to at least preserve their capital until conditions improve. However, once that occurs, there could be extreme selling pressure, as funds are moved into "riskier" investments and the possibility for an historic top in Treasury prices in the next several months might not be farfetched.
Technicals
Looking at the daily chart for March 10-year note futures, we notice that despite the recent recovery in prices, the market is still making lower highs. The recent rally above the 20-day moving average looks in jeopardy, as follow-through buying usually seen by short-term momentum traders has failed to materialize. This combined with large speculative accounts cutting-back on their short positions last week seems to suggest that the recent rally was the result of short-covering and not fresh buying. Volume has remained steady the past several weeks, and the 14-day RSI is currently neutral, hovering right around the 50 level. Major support is seen at the February 9th lows at 121-095, with resistance seen at the recent highs made on January 28th at 124-30.
Mike Zarembski, Senior Commodity Analyst
