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.

Rates Blow Through 3.2%

A worse than expected 30-year treasury auction today sent intermediate and long-term rates soaring today. Ten year rates blew through the 3.2% level. Two weeks ago, I discussed potential resistance at the 3.20% level and after that resistance at 3.35%. Rates approached this level before backing off slightly to close at 3.295%. I had been watching the past couple of days for a test of the highs and was expecting a breakout to the upside. Rates tried to break down on the Bank of America capital requirement report but quickly returned to the 3.15% level. Rates then tried to go higher but with limited success. This morning, unemployment claims came in a bit lower. Still, weekly claims remain high but the momentum is waning. This brought rates up through the 3.25% level.

Rates appeared to be setting up for a drop prior to the 30-year auction. Notice how on the hourly chart, rates were testing the three period high and appeared to be failing. Then the disappointing auction results were reported. $14 billion with a high bid of 4.288% with only a 2.14 bid to offer rate. The market was expecting a high bid of only 4.17%. Well, as I have been writing for months, eventually the heavy supply coming to the market each month was eventually going to have an effect on rates. And now with the stock market up on the year, receiving 4% for 30 years just doesn't seem to cut it anymore. But how will this all play out?

Most certainly, higher rates are the one thing that the Federal Reserve was trying to prevent. Will they now move into the market aggressively to force rates down again? This is always the wild card in the bond market. Higher rates will certainly have a negative impact on the market. And those who escaped the stock market and went to bonds might yet again get their heads handed to them. How many heads can you lose in one stock market cycle? In the end, while rates may come down as they are well overbought at present level, one still needs to be playing rates to go higher and the dollar to go lower.

The stress test results come out in 30 minutes. How will the government manage this report to help push rates down? It will be interesting.