US TREASURIES END SESSION MIXED. SUPPLY CONCERNS FOCUS ON SHORT END OF YIELD CURVE. EXPECTATIONS ARE FOR IMPROVING ECONOMY TO FURTHER ERODE DEMAND, INCREASE INFLATION.

TREASURIES ended Monday's session mixed as speculation that the US economy may be approaching and end to its recessionary cycle was met with mixed reviews. US government securities on the short end of the yield curve up to 5 year notes came under significant pressure during the session. US 2 year notes extended their biggest weekly decline in a year as the prospect of rising interest rates by the end of the year, spurred by the emergence of the US economy from a historic recession and credit crunch, erode demand for low yielding debt amid ongoing historic market supply and expectations of returning inflation and in some sectors, possible stagflation as unemployment is not likely to peak out until at least the middle of 2010.

In the near term, the short end of the yield curve is contending with another week of near record auctions. A total of $65 billion of 3, 10 and 30 year US government securities will be coming to auction this week. Traders will be observing if a certain level of pent up demand for these securities enables the markets to hold above near term support levels. Elements which did offer some support to the long end of the yield curve was a rebalancing of portfolios to focus on longer term bond positions as an aging population seeks steady income from corporate debt which reached exceptional return potential earlier this year. In addition, the downgrade by S&P of Ireland's government debt spurred purchases of US government securities as a perceived move to security (for now).

Technically, Sept 30 year futures continue to maintain a downward bias, with 112-310 setting up as a near term support. While the longer term outlook remains bearish, a hold of the 112-20 level could result in a rebound off of the oversold RSI ranges. Initial upward target is likely at 114-100, with 115-135 and 115-240 setting up as points of significant resistance.

US DEBT FUTURES

OPEN

HIGH

LOW

CLOSE

CHANGE

US U9 (US 30 YRS)

113-200

114-120

113-140

113-140

+7/32nds

TY U9 (US 10 YRS)

113-250

113-250

112-315

113-080

-1/32nds