Treasury Bonds & S&P
Sally Limantour
February 23, 2007
Treasury markets have retreated with all of the inflationary talk and concerns off the CPI report coupled with the strong rally in many commodity markets this week has the bond bulls a bit spooked. It was interesting to hear Bill Gross of Pimco announce a change of heart in that he is reducing his bond holdings and raising cash. He has called for a weaker economy for quite a while and now is so disenchanted with US debt markets that he has raised his holdings of cash equivalent securities to the highest level in almost 2 years - up 26%, or now 43% of the 99.9 billion.
Action: continue to sell rallies in the bond marketThe S&P had a good range day yesterday but unable to hold the highs. For the majority of the week the smart thing has been to buy the breaks with the
market continuing to drift back to the “point of control” area of 1457.50-1458.00 (basis ESH- mini S&P). My shortest term model continues to flash a sell since last Friday, so selling the strong rallies here has been my strategy this week. Medium term model remains neutral but the risk adverse signal continues to build higher. It still appears the goldilocks theme is the background with money flows healthy and liquidity ample. Yesterday the Kansas City Federal Reserve Bank had a much stronger survey (+31) than expected reflecting strong new orders, employment and shipments. In addition, the IFO dialogue overnight suggests that growth in the Euro zone is not expected to end.
The main threats going forward in the near term would be interest rate/inflation fears, geopolitical concerns (Iran jitters and another ship sent in yesterday) and anxiety towards the sub prime lending resurfacing after Lloyd’s TSB’s badly received figures. Rising oil prices too are on our radar.Outside-the- range numbers for ES H7 are now 1475.75 on the upside and 1440.50 on the downside with today’s value area falling between
1461-1455.50
