Market Profile Signal - Undersupply condition confirmed - buy the dip

Unfortunately for Friday mornings large buyers, when Draghi briefed the EU Parliament on Monday, these were the headines:

*DRAGHI SAID BUYING SHORT BONDS NOT STATE FINANCING, GAUZES SAYS

Sept. 3 (Bloomberg) -- Buying short-term bonds isn’t state financing, Draghi told European Parliament panel, parliament member Gauzes says.
●    Draghi spoke to closed-door meeting today

 This means that, if Draghi is correct, then the ECB can and will be printing unlimited Euros to finance state governments (Spain and Italy) for 3 years at a clip.  This would of course mean that Europe is saved and the global depression solution has been found.  I'm sure the Germans won't be happy about this, but hey, if the EUR isn't dissolved, then printing really is the only way out.  This has caused a decent selloff in German Bund futures (3/4 of a point).

The corollary in the US bond market is similar (we have sold off a bit as global bond yields tend to move together...but not as much as Germany).  We will know more details about the ECB's plans in the days to come.

Moving on to Market Profile, we see in the US Treasury market that a new mode has formed in ZN @ 133-18+ (Dec contracts).

This would put the bottom of the bell curve @ 133-12 (the overnight low has so far been 133-14).  I bought a few ZN contracts at 133-14 (just a lucky guess) before they returned to the 133-18+ mode.

As things stand now, I see 3 forces in the market from Draghi's comments, all dependent on confirmation from Germany.

1. Potential solution from the ECB will make peripheral European govt bonds rally
2. Global stock markets will rally from the expectation of Europe being saved 
3. Safe haven securities such as German govt bonds and US Treasuries selloff.

This "printing" would of course cause a pretty hefty currency devaluation..but hey...thems the breaks.  Hopefully, the Swiss would have bought some chunky amounts of gold with their EUR reserves.
 
However, there is another force, and that is the undersupply condition that I believe is now embedded in the US bond market, caused by Friday morning's large buyers @ 133-02+.  These large buyers bought so much paper (creating so many shorts) that the US bond market should have no choice but to trade to higher prices as these shorts will need to flatten out their positions before non-farm payrolls number on Friday.

The comparison between these 2 forces (Draghi vs Friday's large buyers) is simple...fear of the future vs positions held now.  While fear of the future may indeed prove to be correct in the long term, in the short term, its positions that matter...and positions are short (except for that one pesky large buyer).  Also of note is the yield spread between US Treasuries and German govt bonds.  This spread has been holding around 25-28bps...and just recently has compressed to 17bps...i believe due to the undersupply condition embedded in the US market from Friday's buyers.

(note the "vs DE" column = yield spread to German 10yr in bps)

So, the mode has been set, the undersupply condition confirmed, and we now just need to buy any dip below the mode.  The micro bell curve around this mode (so far) puts a micro bottom at 133-16+, and a real bottom @ 133-12.  So, If we get another chance, that's where I will try to buy the market in size this morning.  Recall there is a new POMO schedule, with 2 buybacks today (7yrs and then 30yrs).  These POMO buybacks combined with the undersupply condition should prevent the market from selling off beyond the bottom of the bell curve as just identified.

Month-end cyclical dynamics.  Recall that the cyclical trend in bonds is to rally into month end, and selloff into the 30yr bond auction.  As we are now past month end, there are those who sold the pop on Friday playing the cycle.  While these shorts from Friday's high may prove to be correct by the bond auction, that is too far away.  For today, right now, there is an undersupply condition in treasuries, which means the short term trend should be to higher prices.  I expect this undersupply condition (and thus the short term bull trend in bonds) to be over before Friday morning, and probably before the end of Thursday.


good luck trading...govttrader out