Thursday, June 11, 2009

Strong Resistance Seen at 4%

10-year rates broke through the 4% level briefly this morning following the jobless claims and retail sales numbers. Job losses came in again above 600,000 yet analysts claim this to be good news. Retail sales improved 0.5%. Rates have since backed down and hold the 3.96% level as I write.

The above chart shows significant overhead resistance at the current level. Any sharp move through 4% will certainly garner the attention of the Federal Reserve as well as the Treasury Department. The whole key to their economic recovery plan seems to be lower interest raets, cheaper mortgages, a stronger housing market, etc. Higher interest rates will certainly derail any plans for recovery here.

As jobless claims continue to be high, the economic consumer engine continues to dwindle. There is every good reason for rates to fall as the economy continues to be weak. However, the government continues to flood the market with more and more debt each month. This afternoon, the 30-year paper will be auctioned. Yesterday's 10-year auction came in at 3.99%, 0.80% higher than last month's auction results! This can't be good news for the government, nor the Federal Reserve which has been buying treasuries. Rising rates result in falling prices for the interest-sensitive assets held on their balance sheet. This should result in a weaker dollar.

The Fed could skirt around this issue by applying not applying the mark-to-market rules which banks pushed the accounting standards boards to remove. Without mark-to-market, the Fed could report losing assets at full value on their balance sheet since in 7, 10, 30 years or whatever, they should receive all of the ir money back.

Size Finally Reversing?

While the day is far from over and the 30-year auction results could cause strong moves in interest rates, should the 10-year rates not close above 4%, it appears that Size will begin reversing. This could be a good time to pull the plug on short Treasury Note Futures positions as the manic selling pressure may be subsiding. 4% is a fine level to moderate at. We discussed this in our recent newsletter.

Another possibility for profits is to sell options on futures or interest rate options on the CBOE as declining volatility will deflate option prices.

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