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DJ Debt Futures Review: Dips Even Though 3-Year Auction Supportive
By Allen Sykora
BEND, Ore. (Dow Jones)--Apprehension about quarterly refunding - even
though the first leg was well received - and carryover weakness prompted by
the monthly jobs report on Friday led to a modest loss for interest-rate
futures in Chicago Monday, strategists said.
With those Friday declines, the futures are showing some weakness based
on the charts, said a technician.
Dec 10-year notes settled down 5 ticks at 112-08.5, Dec Treasury bonds
fell 9 ticks to 111-31 and Jun Eurodollars lost half of a basis point to
97.01.
The market had a softer tone in the morning, which analysts at the time
linked to caution ahead of quarterly refunding this week totaling $51
billion, as well as weaker crude-oil prices reducing some of the worries that
higher energy costs could drain the economy.
The market showed some improvement after the Treasury announced that it
had auctioned $22 billion in three-year notes at a high rate of 3.09%, with a
bid-to-cover ratio of 2.24.
"The auction went really well," said Gerald Lucas, chief Treasury and
agency strategist in New York with Bank of America Securities. "Indirect
bidders (which includes foreign central banks) took down 52.6% of it. That's
a very healthy amount.
"The market got a little bit of a bid after the auction, but is now
fading."
There did not appear to be any major influences behind that fade, he
added.
"It could be a little bit of a hangover from payroll Friday," Lucas said,
in reference to possible momentum from Friday's sell-off.
Also, he continued, there could still be some apprehension about a $15
billion auction of in five-year notes on Tuesday and $14 billion in 10-year
notes on Wednesday. The bidding deadline is noon CT (1800 GMT), with results
to be announced shortly afterward.
"It's sort of a quiet Monday," said Lucas. "We have one auction down and
two to go. People are a little bit concerned, although at least this first
one went well."
Some technical weakness has set into the market in the aftermath of
Friday's sell-off, which was prompted by a 337,000 rise in October non-farm
payrolls when the market had been looking for 192,000 instead, technicians
said.
The Jun Eurodollars may be showing more pronounced weakness than the Dec
10-year notes, explained Stephen Suttmeier, senior technical analyst in New
York with Informa Global Markets. The Eurodollars have already slipped below
levels that would suggest the market may have already put in a significant
top. While 10-years have fallen below their 50-day moving average, they at
least are still holding above the bottom end of their range from August.
"Jun Eurodollars did confirm a three-month top late last week that had
developed since the beginning of August," said Suttmeier. "It had a neckline
that came in right around the 97.15 area and decisively broke down Friday."
Some chartists might refer to the charts as rounding top.
"But it's definitely a topping pattern and projects risk, initially,
down toward the 96.85 area, which is the Aug. 3 low," said Suttmeier. "There
is also deeper risk back toward the 96.615 area, the pivotal low from July
28."
The contract has also fallen through its 200-day moving average near
97.13, said Suttmeier.
"If you do get a recovery and it stalls from 97.13 to 97.20, the idea of
a three-month top remains valid and it suggests you could see some deeper
weakness in this market," he said.
The Dec 10-year notes have broken down through their 50-day moving
average, which passes through around 112-25, said Suttmeier.
"We broke it Friday and then sustained a close below that on a weekly
basis for the first time since we started trading above it back in June," he
said. "The fact we did do that on a weekly basis, and if we do that this
week, it doesn't bode well for 10-year notes."
This exposes key support at the Oct. 7 low of 111-21, which the market
briefly fell through Friday when it bottomed at 111-16, said Suttmeier. If
the futures were to accelerate downward through this area, said the technical
analyst, it could suggest that a top is in place at the Sept. 23 high of 113-
25.5 and the Oct. 25 high of 114-05.
"If you were to sustain a breakdown below the 111-21 area, there is some
significant risk initially toward the 111 area down to 110-24, which are
prior lows," he said. Also, he said, this would bring into focus the 200-day
moving average, which currently passes through the area around 110-09.
The notion of a top possibly being in place will continue as long as the
10-year futures are unable to poke up through downtrend resistance, which
currently passes through the area around 113-11, said Suttmeier.
Besides the auctions, the other key event for the market this week is
Wednesday's meeting of the Federal Open Market Committee. Economists are
looking for the Fed to up the federal-funds rate to 2.0% from 1.75%.
The economic calendar is quiet during the early part of the week. No
major U.S. reports were released Monday, and the main piece of data Tuesday
is the 0900 CT (1500 GMT) release of wholesale inventories, which are
forecast to rise 0.7% in September.
-By Allen Sykora, Dow Jones Newswires; 541-318-8765
[email protected]
(END) Dow Jones Newswires