In an interesting but somewhat counterintuitive development, today's big rally in the dollar is being credited as a major factor in breaking the bonds. The reason? If the dollar begins to rally on its own, it becomes less necessary for foreign central banks to support it through purchases of Treasury issues. Hence, less demand for treasuries. Since the Fed will be under no pressure to raise rates to defend the dollar, we could begin to see a steepening yield curve, historically a bullish environment for equities although you wouldn't know it from today's action.
Less Demand for Treasuries as European Bonds become more competitive and have tremendous capital gains potential should the ECB ease. US Bonds also got ripped today on the Us Treasury making the suggestion of bringing a 20 year TIP to the marketplace, thus increasing supply. This is the first talk of something like this, since the 30-year was discontinued in refundings. Stay tuned!
CBOT Treasury futures drop in reversal action CHICAGO, Jan 23 (Reuters) - Long-dated Treasury futures at the Chicago Board of Trade slumped Friday and appear poised for technical reversals from six-month highs, dealers said. Weakness in the futures stemmed from fears that in the event of the U.S. dollar showing surprising strength, it could lessen the need for foreign central banks to buy dollars and U.S. Treasuries with the proceeds of currency market interventions. Such buying has propped up bond prices recently. "Foreign central banks have been using intervention money to buy Treasuries, and that has been the only major buying we have perceived recently," said Doug Warner, a vice president with Man Financial. The sell-off was driven by fresh worries about large supplies of U.S. debt swamping the fixed income market. The U.S. Treasury on Friday said it wanted feedback from dealers on a proposal to issue new 20-year inflation index notes (TIPS). Later, U.S. Treasury Secretary John Snow spoke about the issue as if it was already a done deal but shortly afterward stepped back from that assertion and said that no decision had been made on the 20-year TIPS. "We already know we are running record high budget deficits, and word of a possible 20-year TIP means there could be a whole new issue coming to light. That just piles onto the existing worries about supplies," Warner said. March 30-year bond futures <USH4> brushed resistance at the Jan 16 high of 113-22/32, reaching 113-21/32 before falling to leave a potential double-top on daily charts. The contract, which was trading at 111-25/32 shortly before the close, could have a technical reversal by closing below Thursday's low of 112-07/32. In benchmark 10-year note futures, March <TYH4> reached its highest level since late June before falling back. Dealers said 10-year note futures were boosted early by a continuation of options-related buying seen on Thursday ahead of Friday's expiration of February serial options. Traders who had written February 114-00 10-year call options were forced to buy futures on Thursday and into early Friday when March futures rallied through the 114-00 strike price. Once that buying was exhausted there was little left to support the contract, they said.