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July 13th, 2012
The Treasury market managed an initial new high for the move overnight off the knee jerk reaction to the weakest Chinese GDP readings in 3 years. It is also likely that Treasury prices benefited, at least temporarily, from fresh credit rating downgrade news from Moody’s toward Italy. However, the markets have seemingly spun the Chinese growth figures into a positive by suggesting that they weren’t as bad as some expectations. Furthermore, the Italian debt rating threat was countervailed by an actual drop in Italian debt yields in an auction early this morning. However, despite the quasi reversal in Bonds and Notes from fresh new highs for the move overnight, prices still sit within relatively close proximity to their highs into the US Friday trade action. Another issue that might have prompted profit taking from the overnight highs is news that UK Construction Spending jumped sharply. However, from initial expectations on US data flows today it would appear that the bull camp might expect to see some lift in the wake of the data. In fact, another decline in PPI and a minor slide in a private consumer sentiment survey this morning would seem to provide a cushion for Treasury prices in the face of a partial risk-on environment. Clearly the Moody’s news leaves the flight to quality theme in place, and while the market was able to spin the Chinese economic data into a positive initially, the trade probably won’t be able to fully remove the global slowing view. In fact, Treasuries probably see some lingering support from the JP Morgan story as earnings news this morning has brought that subject back into the headlines again. The Treasury market might also see some fresh buying interest ahead of a speech from the Fed’s Lockhart around mid session. While the Treasury market is probably looking forward on the data front, the surprise decline in US claims from yesterday is something that could eventually come back to haunt the bull camp, but only if the market finds some other noted sign of growth from data directly ahead. Comments from a US Fund manager overnight might serve to hold back Treasury prices today. He suggested that Treasury prices could now be hitting a peak, but those comments are probably given less credence because another well known bond fund manager earlier this week predicted the US Unemployment rate next year at this time would be higher than current levels. To start, Treasury prices are slightly off balance because of a weak risk on vibe, but US data might serve to erode a portion of the up beat tilt.
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