After treasuries opened this morning with sizable bullish gaps, the Bureau of Labor Statistics reported headline Producer Price Index to be 0.5 % and Core Producer Price Index to be 0.8 % while both were expected to show 0.3 %. Purchasing Power Parity has not been particularly important during the current inflation conversation and today's report was 15 days overdue, and all that appears to be a good thing since the numbers seemed to have no impact at all.
One thing I do know is that yields are reaching levels that can prove to be an important test for treasuries. Yesterday good gains were made, most of which came between 9:00 and 10:00 and I honestly don't know why, but then I'm a technician and I'm not supposed to concern myself with why.
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The daily ranges were just about back to normal, contract switching seems to be over and volume for 5 and 10-year futures was about average, so that doesn't tell me much but on the 18th, I noted that if the 5-year yield were to break below its trendlines, it still had strong resistance about 9 bps lower, while the 10-year had strong resistance both 5 bps and 10 bps lower than where it was on the 18th, and the 30-year had strong resistance from a gap about 8 bps lower.
The resistance areas I was referencing end at 3.530 in the 5-year, 3.943 in the 10-year, and 4.603 in the 30-year, or about half a basis point from where the 5-year has reached, about 3½ bps from where the 10-year low yield, and about 4 bps from the 30-year low yield, and all three are have already interacted with resistance this morning.
Based on how treasuries have been trading for most of the past year, these areas are not likely to all be broken without putting up a fight.
It's not that I don't think yields could go lower, but the only thing that I have found to be even remotely predictable has been reactions away from good technical levels. The fact is that in the big picture and from a technical perspective, there is still plenty of room for yields to go down since simple 50% retracements of the major bearish breaks from 2020 into 2023 would see yields across the board close to 2½ %.
I seriously doubt we'll see that, certainly not across the curve, but I wouldn't rule out the short end approaching that area although not likely during this current cycle. That sort of a rally would more likely be seen in a large degree C-wave, so a 5-wave impulse wave which would start from close to 5%, and it's virtually impossible to make the case that treasuries are in large degree C-wave rallies.
Today will almost certainly end with very bullish looking monthly, weekly and probably daily charts, but the opening gaps could draw yields back up or worse still, contribute to island reversals on soft openings next week if they remain intact today. Those gaps need trades at 3.576, 4.014, and 4.668 to be filled.
I think a good deal of caution is in order here.
