I love all the talk about how rates fell because the Treasury showed restraint by cutting its offerings. The Treasury is now expected to issue $776 billion over the next three next months instead of the original projection of $816 billion.

Meanwhile, the Treasury announced the size of its refunding auctions for the 10-year and 30-year this week on the $40 billion and $24 billion scale, respectively, versus the estimates of $41 billion and $25 billion. So, they took $1 billion off the offering size. Is this a big deal?

Last month, the Treasury had a 30-year auction of just $20 billion in size, and it was a complete disaster, with the issue tailing by almost 4 bps above the when-issued rate, while the bid-to-cover ratio fell to 2.35 from 2.46 the previous month. The 3-year auction coming this week will also be larger than last month’s at $48 billion instead of $46 billion.

The auction last month tailed by one bps and saw its bid-to-cover ratio drop to 2.56 from 2.75. Meanwhile, the 10-year will see a $40 billion auction this week, up from $35 billion in the last two auctions. The 10-year may have been the worst of all auctions last month because it tailed by 2 bps and saw its indirect acceptance rate plunge to 60.3% from 66.3%. So, we will see how this week’s auctions go.

Last month’s auctions were a disaster, and now, this month, the size has grown, and we should expect it to go better. Pay attention to the 1 PM ET time slot this week from Tuesday, Wednesday, and Thursday, when the auction results will be released. Better auctions mean rates go lower, and bad auctions mean rates go higher.

The big reason why Treasuries rallied this week was that the market was betting on a refunding size of greater than $114 billion, and instead it came in smaller. That caused some short-covering, and that caused rates to fall. The most interesting thing I noticed on Friday was that, following the weaker headline jobs report, the 30-year plunged from 4.79% to 4.67% to close at 4.77%.

Not to mention, wages in the employment report came hotter, with the year-over-year reading rising by 4.1% versus estimates of 4.0%. More importantly, last month was revised higher both month-over-month and year-over-year. The only saving point was that headline wage growth month-over-month came in at 0.2% versus estimates of 0.3%.

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It was a similar showing in the 10-year rate, which bounced off its 50-day moving average and an uptrend since mid-July. It wouldn’t surprise me to see rates rise into these auctions as traders bet on them not going well.

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S&P 500 (SPY)

Meanwhile, the S&P 500 rose to what is becoming a very important level of resistance at 4,375. It has significance from a few standpoints. It was a level of support and resistance going back to mid-August. It was the level the index gapped below back in late September, and it has been resistance since then. It also has the 61.8% retracement level that dates back to the Sept. 1 and Oct. 27 lows.

Where the index goes this week will tell a lot about the structure of the move since mid-July and what it likely means going forward.

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So, there are two options here: the index needs to gap higher and take that resistance level out at 4,375 to 4,400, or it will fail to do so, and we will retrace some lower. All the index did this week was retrace the declines from the previous week in nearly the same manner in which it fell -- which, by the way, was a retracement of the rally from the week before that.

This has happened on several occasions since the peak in 2022, and ultimately, the index has resolved in the direction of the larger trend, which in 2022 was lower and in 2023 had been higher until mid-July. If, indeed, this pattern persists and the trend now is lower, then the S&P 500 is likely to resolve lower and, based on previous examples, into a new low.

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There was a clear cycle shift in July when the S&P 500 created a bearish engulfing pattern, just as a bullish engulfing pattern at the Oct. 22 lows was formed. If the market follows the typical pattern, then in the next week or so, the rally of last week will be erased.

Again, this can be largely invalidated by the index being able to move firmly above 4,400, which has been the resistance zone, as noted above. That would probably set up a move higher back to 4,525.

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I know this doesn’t go with the calls for seasonality, but then again, there is an old saying that goes something like 'markets don’t bottom on Friday, too.'

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