Yields soar as flight to quality squashed

An overdue recovery in the Euro and U.S. equity markets lured money back into risky assets and away from the safety of Treasuries. One day does not make a trend, but this seems to be the beginning of some attempt at “normalcy”.
We have been getting solid economic news recently despite a few minor disappointments in this morning’s data. The latest revision to the first quarter GDP was reported at 3%; a bit less than the expected 3.2%. Similarly, weekly jobless claims remain stubbornly high. According to the Labor Department, last week’s claims for unemployment benefit was 460,000.
The Treasury markets have spent their seasonally bearish months rallying, and this makes speculation going forward very difficult. In a typical year, bonds and notes should have traded weaker for much of April and May and would be “looking for a bottom” in early June. However, with bond and note prices so elevated it is difficult to imagine that the seasonal lows will be put in sometime in the next week.
Completely ignoring seasonals, it seems as though the financial markets might have turned the corner for now. We feel like the June Euro futures has the potential to see a very large short covering rally (maybe as far as the high 120’s). Similarly, the S&P shouldn’t run into strong resistance until we see the high 1120’s or mid 1130’s. Assuming that we are correct, that should put continued pressure on Treasuries in the near-term. We see the first area of support in the September 30 year bond futures just under 121 but if we get some follow through, as low as 117 is possible by late next week.
If you are a bear that has been struggling to scratch on a short trade, it might be a good idea to unload some of your risk. Counter-trend Friday and a three day weekend poses a risk to the market’s bearish tone.
Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
Local : 702-947-0701
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