Mel's Blog

Bonds are trading near the unchanged level and remain beneath a tough layer of overhead resistance.  Today is a slow news day with nothing noteworthy on the calendar.  Traders are not likely to place any big bets in advance of Friday's important Jobs Report, therefore I don't expect any major price moves over the next day.  But read on, as Friday is setting up to be a real shootout with Bond prices poised for a breakout.  

Tomorrow I will lay out our plan of action heading into Friday's Jobs Report, but one thing to consider in the meantime is the release of the Automatic Data Processing (ADP) payroll number, which was reported this morning.  The ADP report showed 64,000 new private sector jobs added in April, and when you factor in the three month average of government jobs added, this report calls for 91,000 new jobs created in April, or just slightly below the 100,000 estimate for Friday's official number.  Bond prices had little reaction as the ADP number was close to the official estimates.  Additionally, the ADP results have been less than reliable. 

Here's an important story to follow - I have discussed on many occasions how investors around the globe search for yield.  In recent years, there has been a lot of foreign buying of our Bonds.  And this foreign buying has helped keep our interest rates low.  But times are changing, as Bond yields in other major foreign markets have been gradually rising.  For example, when comparing the yields of US Treasuries with those of Great Britain, it was common in recent years to see US yields higher than those offered in Europe.  But now, things have changed, and Bonds in Great Britain actually offer higher yields. 

Foreign investors have more of an incentive to keep their money "closer to home" in their own countries, and this has the effect of less foreign investing in our US Bonds.  Foreign purchases of our Bonds has averaged $16 Billion a month this year, down from $23.5 Billion a month for the previous year.  Should this fall-off in foreign support continue, it may pressure our Bond prices lower over time and thus apply upward pressure on our long-term interest rates.  

Technically, the chart below shows how Mortgage Bonds are being squeezed between a very strong ceiling of overhead resistance provided by the 100, 40, and 50-day MAs at $98.92, $98.94, and $98.98 respectively and the Lower Trend Line. As Bond prices get pushed into the apex of the angle formed between these two levels, the potential for a powerful breakout increases.  And with the Jobs Report coming Friday, this pending breakout could occur on the release of the news.