Land of Confusion
Fundamentals
Treasury Secretary Geithner was expected to provide clarity on exactly how the Obama administration was going to deal with the banking crisis. Instead, he gave a long-winded speech reflecting his personal ideology and stated that the administration will be aggressive with no specific details. This shocked the equity and economically sensitive commodity markets, while sparking a rally in defensive instruments, i.e. precious metals and treasuries. The Bond market seemed poised to sell-off before the week began, as the government was issuing a record amount of debt this week. Yesterday's 10-Year Note auction, however, showed bond investors still have a surprisingly strong appetite for US debt. There were worries that dealers would shy away from purchasing notes after the stimulus package was approved by the Senate, which will increase the size of upcoming Note and Bond issues. The Street has been suspect of the stimulus package, as it includes too little in the way of tax cuts and too much in the way of government spending. Why, then, should Bond investors offer the US government cheap financing? Fear seemed to trump the skepticism that the Bond market will be able to digest the massive amount of debt. Today's 30-Year Bond auction may receive the same warm response that the 3-Year and 10-Year Note auctions met in prior days, which can be seen as bullish for Bonds in the short-term. It is difficult to see upcoming auctions receiving the same response that this quarterly auction did. The equity markets will dictate the direction of the treasury markets in the near-term, as the inverse relationship between the two markets seems to have been restored after the Bond market's huge sell-off in January. A relatively stable greenback may also act as support for treasuries, as they would be the logical place for overseas investors to park their money.
Technicals
Turning to the March Bond chart, the market seems to have found support near the 50 percent Fibonacci retracement. After dipping below the level on Friday, the market did not see enough downside pressure to confirm a downward breakout. Instead, Monday's price action formed a spinning top, suggesting Tuesday's rally may have been aided by technical buying. Prices have crossed above the 18-day moving average in early trading this morning. If prices are able to hold the average, it suggests that a near-term low may be in place. On the other hand, failure to hold the average would be seen as a psychological defeat for bulls, and prices could once again test the 50 percent retracement level. Momentum is showing sharp bearish divergence from both price and RSI, hinting at a possible reversal in upcoming sessions.
Robert Kurzatkowski, Senior Commodity Analyst
