The price of Treasuries pushed up higher yesterday once more, despite stock prices falling on more QE tapering fears. This is the 2nd consecutive day this has happened. As it is rare that bonds and stocks run on separate broad market drivers, the likelihood of one or the other asset class moving in the “wrong direction” exists. Should the divergence continue for the next few days, the likelihood of a strong correction in either stocks or Treasuries increases. Looking at how the USD has been reacting, it seems that the 'Taper Fears' assertion holds some water.
As such, the question we need to ask is what is actually driving Treasury prices higher despite the surety of a taper in either 2013 or 2014? The most obvious answer would be that speculators have pressed prices too low, leading to the September FOMC event last week. Hence currently, the market is still smarting from the miss.
The best confirmation for such sentiment would be bulls managing to break above the swing highs of last week. Failure to do so will suggest that taper fears continue to reign and the divergence with stocks may end soon, favoring a bearish move for Treasuries going forward.
Hourly Chart
From a technical perspective, price is being kept at the 127.0 ceiling but the short-term pressure is on the bullish side as prices have managed to break above the ascending channel that has been in play since the end of last week. Stochastic readings disagree though, with readings pointing lower following a bearish cycle signal – which was triggered with 127.0 holding during late U.S trade. However, the stoch curve has since significantly tapered flat, and readings could still move higher from here given that the previous trough occurred around current levels as well. As such, do not take anything for granted especially when clarity in fundamnetals is lacking.
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