Treasuries are finding it difficult to embrace bad news

It is generally understood as prudent to allow geopolitical developments to ‘mature’ prior to picking any directional reverse for securities prices. That could certainly apply in the case of safe haven consideration for U.S. Treasury securities on the back of Russia’s heightened interest in Ukraine.  Treasury prices jumped over the weekend following news of Russian involvement in Crimea region of Ukraine.

Monday, Treasury prices had not held onto the higher opening levels from Sunday night, but remained higher on the day. Monday’s price action is not consistent with the bullish implications of heightened safe haven status. Instead, an unconfirmed bearish formation has developed that commands attention.

Economic data is not expected to have the same impact on Treasury prices as it might without current headline news.  However, Monday’s economic reports were generally favorable toward the prospects for a recapture of the pre-severe winter weather pace.

ISM manufacturing for Feb at 53.2 scored higher than Bloomberg survey 52.3 and the prices paid component was higher as well at 60 v. consensus of 57.5.  This followed on the heels of slightly higher PCE Deflator (year over year) and GDP Price Index. Personal Income and Spending reports for January were also better than expected.  Again, we should expect the headline geopolitical news to capture attention and override economic news that is slightly outside (above or below) of expectation.

However, as much as we might like to dismiss economic data as irrelevant at this juncture, the Fed has advised that they are ‘data dependent’ with respect to securities purchase plans and  are not on a predetermined path, though they made strong efforts to help economic agents recognize policy-path intent in their taper plans.  That said, the economic data series over the last month and a half has been consistently below expectations and has lead more recently to greater concerns that the weakness is much more than an expression of severe winter weather affect.

The Citi Economic Surprise Index for U.S. has fallen from 72.7 (see chart above) in mid-January to a negative 15.3 as of Friday; the most it had fallen over a like timeframe since May of 2011.  So, while we might want to completely dismiss economic data in time of geopolitical upheaval, we can more easily do so when economic conditions not in flux.  The extreme move from positive or over-inflated expectations for U.S. economic growth to depressed levels in such a short period of time suggests economic data expectations may be in a period of flux.

The daily chart of TYH shows yesterday’s price opening above the resistance dating back to October ’13, a resistance reaffirmed in early-February. Similar to the single session price action on Friday, the candle today forms a bearish ‘hanging man’.  We take note of the smallish differential between the opening and closing levels and recognize this as indicating indecision. Bullish Treasury participants should not be expected to demonstrate indecision given the rising prices.  Rather, because the geopolitical news, they might have been expected to add to positions in light of continued developments during the session.  In the absence of those gains, we take strong note of the proximity to prior resistance area.  Likewise, cash rates are approaching strong levels of resistance.

A lower opening on Tuesday followed by a still lower close would jeopardize the prospects for a bullish advance even with geopolitical unrest. Stronger economic data largely ignored during such times should be given at least a modicum of attention especially if it is consistent with above trend growth.

About the Author

Martin McGuire, managing director at TJM Institutional Services

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