Economic Numbers for 11/26/08: 8:30 am US DURABLE GOODS ORDERS (-2.6%), US WEEKLY JOBLESS CLAIMS (EARLY RELEASE, 537 K) PERSONAL INCOME (0.1%), CONSUMER SPENDING (-0.9%)9:45 am NAPM Chicago Index (36.5)10:00 AM US CONSUMER SENTIMENT ( 57.9) US NEW HOME SALES (450,000) 10:35 AM EIA INVENTORY NUMBERS (OIL & PRODUCTS)12:00 PM EIA INVENTORY NUMBERS (NATURAL GAS)
U.S. TREASURIES STAGE MASSIVE RALLY AS LATEST TREASURY PLAN TO BUY DIRECT MORTGAGES CREATES DEMAND BY LENDING INDUSTRY TO SCOOP UP TREASURIES FOR HEDGE.
US Treasuries staged another massive rally in Tuesday’s session, sending prices near the highs touched on last Thursday’s record rise. Once again, the US Treasury was in the center of the maelstrom. What set this rally apart from most of the recent moves was its motivation. Instead of fear or greed, Treasuries were driven in today’s session by a concept that appeared to be lost in this last year-optimism. For the first time in recent memory, a rally in Treasuries was supported by an industries necessity to position itself for an eventual recovery. This industry was the mortgage market. The Federal Reserve announced that it will purchase as much as $600 billion of debt issued or backed by government chartered housing finance companies. It will also set up a program to support consumer & small business loans. By taking direct access of these loans from their current holders, the Federal Reserve is hoping to finally force mortgage rates down in line with the series of rate cuts & opening of credit windows which have allowed banking institutions to borrow at record low rates.
Treasuries rallied in the wake of this news for two major reasons. First, the agencies that will be selling their agency debt to the Fed need to swap out the interest bearing instruments for another. Longer yielding Treasuries (30 & 10yrs) offer the highest payout-despite their historical low yields. Second, the potential for the lending market to receive a flood of new business in the wake of falling consumer interest rates spurred lending institutions to buy Treasuries as a hedge against defaults & falling interest rates (remember the Series 3 questions on this?)
Whether the gains in Treasuries will hold remains debatable. While the move by the Federal Reserve to make direct mortgage purchases may be considered the exact type of aggressive move needed to unfreeze consumer borrowing, the recommitment of funds does limit the ability of the Treasury & Federal Reserve to make the type of aggressive purchases of US bonds & notes that drove the massive seven point rally last week. If the market perceives that the guiding hand of the almighty US Treasury will continue to shift away from direct government debt purchases, it could represent a top for the market, at least for the near term. Movement in bonds on optimism instead of panic is a novel concept in this trading environment.
Technically, December Bond futures were given room to run to the upside by their pullbacks from Thursday unprecedented rally. Failure to breach the 128.16 resistance level should result in a pullback to the 126.15 level, with next level at 125.16. Significant gap still remains to fill in down to 120.03 before oversold condition.
December 30 yr Bond Futures settled at 126.290, up 1 20/32nds. US 10 yr notes settled at 121.055, up 1 25/32nds.
Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.
