The Treasury rally backed off on Wednesday ahead of the government’s latest read on the employment picture. Earlier in the week ADP predicted the non-farm payrolls to see a considerable increase and analysts estimates are looking for about 190,000 jobs added. Even a number slightly below expectations would be considered a victory and makes it difficult to be a Treasury bull. However, that is exactly what might hold the market up. Traders seem to have gotten too comfortable being bearish interest rate products and although we’ve seen a miraculous recovery from the lows there is some risk of a short squeeze. Accordingly, bearish traders must look for upswings near resistance to establish positions, chasing markets lower might prove to be difficult.
Also, there are articles and talk floating around in regards to the Fed itself being a big part of Treasury demand. Some claim that the end of the POMO program could pull the rug from underneath the market. However, the same people (business news media) also predicted Treasuries to rally once POMO was implemented yet in both instance the market traded in a “buy the news, sell the fact” manner. In other words, Treasury futures rallied on hints of quantitative easing but once the program actually took effect the market experienced selling pressure. This makes us wonder if we will see the opposite effect when POMO expires. While it is hard to imagine a full-fledged rally based on fundamentals, it isn’t difficult to envision a painful short-squeeze to shake up the bears.
We were a little surprised to see Thursday’s sharp selling, but we should have realized there would be position squaring ahead of Friday’s number. For this reason, we aren’t giving up on an extension of this rally just yet. Support in the 10-year note lies at 117’24 and again near 117’01. In the long bond, this translates into 117’28 and 116’24.
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**Seasonality is already factored into current prices, any references to such does not indicate future market action.Treasury Bond and Note Option and Futures Trading Recommendations
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Senior Analyst / Commodity Broker
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