Can 30-year Bond Futures Continue Their Rally?
Treasury Bond futures prices have remained strong, with the September contract hitting highs not seen since May, despite signs that the Fed will cut rates at its September 18th meeting and shift from its main stance of fighting inflation. Even Friday’s surprisingly strong New Home Sales figure for July could not spark a sell-off in the long end of the yield curve. Flight-to-quality buying was most likely responsible for the initial Bond rally earlier this month, but with fears of a lingering short-term credit crunch starting to abate, we would expect Bond prices to start to tumble, especially given the rally in equities futures the past week. So what is keeping Bond prices up? First, large speculators continue to hold a net-short position in 30-year Bond futures, with the most recent Commitment of Traders report showing large speculators holding a net-short position of 73,867 contracts, up 43,783 contracts as of August 21st. This may signal that last week’s rally was mostly due to short covering buying or unwinding of spreads against 10-year Note futures, where large speculators are holding a large net-long position. The second factor might be the market’s opinion that the world economy may start to slow more rapidly, with the fall-out from a weak U.S. housing market spreading throughout the globe. The market’s reaction to this morning’s Existing Home Sales figure for July may hint at the near-term trend in Bond futures prices – a stronger-than-expected figure will confirm a bump in housing sales on the heels of Friday’s new home sales surprise, while a weaker figure will add fuel to the argument that the U.S. housing slump continues and that the Fed will be forced to lower rates at its September meeting.
Looking at the daily chart for September Bond futures, we notice the bull move that started at the June lows continues nearly unabated, with prices well above the major moving averages and the trendline drawn from the June 13th lows. The 14-day RSI remains strong with a current reading of 65.19. The next resistance point for September Bonds looks to be at the May 11th highs of 112-02, with major resistance seen at the May 8th highs of 112-11. Support is seen at the 20-day moving average of 110-04. In early trade, September 30-year Bond futures are trading at 110-28, up 0-01.
Mike Zarembski Senior Commodity Analyst.
