BONDS: Treasuries Returning to Classic Form, the Bears Have the Edge

While it is still premature to suggest that the treasury markets have seen a paradigm shift back toward classic price reactions to fundamental developments, the list of factors supporting a shift continues to grow. In fact, with the treasury bond market dropping almost one full point in the wake of the 30-year bond auction yesterday, treasury markets are likely seeing the beginning of negative impacts off surging US debt supply from the debt ceiling fiasco and from the latest extension of that debt ceiling. Another sign that the treasury markets are drifting back to old trading patterns came from the sharp rally yesterday following signs of a decline in a 3rd tier US inflation reading. Yet another bearish impact on treasuries is the ongoing trend down in the dollar. In fact, foreign buyers of US treasuries see very attractive US yields as less attractive because of the potential depreciation of assets held in the US. In today's early action it is likely that a soft US producer price index reading for May will provide a slight bounce in prices which could offer short-term traders a fresh selling opportunity. However, the market has widely factored a Fed pause today and the final Takeaway from the Fed event today could be fresh Fed threats of further rate hikes later this year. Today's trading will start out with a weekly private survey of mortgage applications followed by the May producer price index which is expected to have a moderate downtick from April's 2.3% year-over-year rate. The May core producer price index (excluding food and energy) is forecast to have a mild downtick from April's 3.2% year-over-year rate. The highlight for global markets will come during early afternoon US trading hours with the results of the latest Federal Open Market Committee meeting. The consensus expectation is that the FOMC will keep rates unchanged with a "pause" in their rate hike trajectory. In addition to the post-meeting statement, the Fed will also release their quarterly economic projections which include the "dot plot" of future interest rate expectations, while Fed Chair Powell will give a press conference that should provide clues to the Fed's upcoming policy moves.

Today’s Market Ideas

We see the April through late May downtrend resuming after a slight post PPI report bounce. We see short selling pricing in September bonds at 127-09 and at 113-10.