By Alyce Andres-Frantz

WASHINGTON, Sept 10 (MNI) – The Treasury market is expected to
continue its ongoing flow-driven range trade in the week ahead, which
could easily be amplified by an ongoing technical correction.

So far, September has been a bearish month for Treasuries. After
seemingly five months of dip buying, yields hit their lows on the last
day of August. Since then, sources noted, the Pavlovian response in the
Treasury market has ceased as sellers have finally overpowered buyers.

The move has been predicated by well advertised supply in
September.

Last week it was estimated that September would yield nearly $320
billion in fixed income supply. The combination of which was estimated
to include $100 billion in investment corporate bonds, $25 billion in
high yield supply, $40 billion from emerging markets, and $30 billion
to $35 billion from municipalities via Buy-America-Bonds.

So far, Deutsche Bank credit strategists estimated $35 billion in
investment grade corporate bond supply priced this week, still leaving a
hefty load in the weeks ahead.

The negative mindset seen prior to the Labor market holiday when
10-year yields hit a low of 2.468% gave way as yields retraced to 2.817%
in just a 10-day span as supply pressured the market.

The move is largely viewed as a retracement in an otherwise larger
range that is biased lower and flatter and not one of a turn in
sentiment.

Supply pressures could easily further damage the technical picture.

Bill O’Donnell, head of interest rate research and strategy at RBS
concedes the difficulty in taking a bearish view during a long-term bull
market, but says there is little reason to see a change in the recent
2-week pattern toward higher rates.

Furthermore, the “correction argument” for Treasury yields built
momentum after 10-year yields closed above their daily trendline support
at 2.753% Thursday, O’Donnell added.

The trendline was key because it “is the primary bull trendline
that has guided the market since 4.01% on April 5th,” O’Donnell pointed
out.

O’Donnell looks for a deeper technical correction to target a move
towards support at 2.87% and possibly 3.02% albeit in a choppy manor
over the next one to three weeks.

BNP strategists concurred stating that the breach of 2.75% in cash
10-year was critical.

If rates push higher, “the next stop could be in the 2.85-3% area,”
for 10-year notes, BNP strategists said. “But make no mistake, we do
think that the longer term trend for rates is still lower so we would
view any further selloff as an opportunity to load up on longs. Not just
yet though, as we may need to see the emerging bearish trend play out
first.”

Supply factors in tandem with a bearish technical landscape
should give way to shedding of auction positions ahead of Wednesday’s
settlement, sources said. Moreover, downward price action will continue
to press trapped longs who hung their hats on the expectations for
additional QE2.

On Monday, the New York Fed will purchase Treasuries in the
8/15/2016 to 5/15/2020 maturity zone. The next release of Treasury Fed
buying intentions is due at 2:00 p.m. ET Monday. The new buyback program
could start as early as Tuesday.

Given faster mortgage prepayment data, there is talk that the next
Fed buying program could be $25-30 billion in Treasuries, up from $18
billion in the last four weeks. That would imply that the average buy
rises to about $3 billion.

Sources noted the New York Fed bought $4 billion in U.S. Treasuries
this week, the equivalent of 6,700 December 5-year note contracts per
day assuming a five-day trading week. That was viewed as “a drop in the
bucket” for a contract that averages about 400,000 contracts (traded)
per day. Many maintain that Treasuries will be unable to rally without
another round of QE greater than $1 trillion.

It may also be the case that further deterioration in the technical
landscape will beget model-driven hedging and convexity duration
reductions. There too may be a smattering of Japanese repatriation flows
and or discussions of such ahead of its half-fiscal year end on
September 30. Levels in the US$/Yen will also be eyed.

There are no appearances by key officials. But on Wednesday the
U.S. House holds a hearing on China’s exchange rate, and this could
garner attention. Also, the Congress is expected to continue debate on
the president’s proposed additional stimulus measures as it returns from
the Labor Day recess.

The FOMC meets September 21, and most Federal Reserve officials
will be in blackout. There is a meeting Thursday at the Chicago Fed Bank
on home mortgage disclosures led by Governor Duke. And on Friday Fed
Governor Tarullo participates in a Brookings conference on bank reform.

The economic data is expected to continue to show price gains, as
well as rising retail sales and a rebound in home sales. Economists at
Deutsche Bank say the key data “include August retail sales (Tuesday)
and industrial production (Wednesday) in addition to the September
Philadelphia Fed (Thursday) and August CPI reports (Friday).”

DB expects retail sales to rise 0.3% for both the headline and ex
autos; production to be up 0.4% and for the Philly Fed to return back to
positive territory (+3.0). CPI is estimated at +0.2% with the core
+0.1%.

The week ends in the Yom Kippur religious holiday, which could
slow trading.

International news will also be eyed. This weekend the Basel
Committee on Banking Supervision will discuss the implementation period
for new capital ratios. German regulators have pressed the committee to
extend implementation to 10 years versus U.S. regulators’ demands for
implementation within five years.

Also China moved up its August consumer price and industrial output
date to Saturday versus Monday. This led to speculation that the Bank of
China eyes an interest rate hike prior to Monday.

** Market News International Washington Bureau: 202-371-2121**

[TOPICS: M$$FI$,M$U$$$,MAUDS$]