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September 15, 2011
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There are plenty of reasons as to why traders should be bearish Treasuries but the most glaring being nearly non-existent interest rates and stabilizing currency and equity markets. Nonetheless, Treasury seasonals suggest the market could avoid any large selling until much later this fall. Also, although recent economic data has been better than the previous month's it is still generally below expectations and quite frankly, poor.
Similarly, it sounds as if a much larger than expected Greek tax hike could trigger another round of riots and protests. In the past, visions of Greeks in gas masks violently destroying property in Athens has been perpetually bullish for Treasuries. The thought process is that the unrest (and more importantly debt issues) will be contagious throughout Europe. In a world in which U.S. markets have been celebrating each positive headline out of Europe, a negative one such as this could quickly change the climate. For this reason, among others, we are taking a neutral stance over the next few sessions
For those of you that aren't aware, I spent a few weeks in Greece over the summer (ironically during the now infamous riots) and it is certainly vulnerable to some unrest. Without judging their culture or circumstances (which are challenged), I can' comment on facts. A majority of the Greek citizens don't pay, or pay very little, taxes, and many businesses practice aggressive tax avoidance techniques (such as cash only transactions under the table). On the other hand, entitlement programs are plentiful and so are governmental employee strikes (and yes this includes utilities and many forms of transportation). The point I am trying to make is the transition into austerity will not be an easy one and there could easily be negative headlines coming around the corner that could temporarily spook investors.
Yesterday we were looking for a move to 138'06 in the long bond and the mid 129's, for the most part we got it. However, tomorrow we see some risk of counter-trend Friday buying. Accordingly, we feel like the bears should lighten the load in hopes of "reloading" at better prices at some point in the near future.