How High Can Notes Go?
Fundamentals
The 10-Year T-Note futures have are on the rebound after flirting with the 123 level last month, but questions remain about the upside potential of the market. Unless there is a huge fundamental shift, it is difficult to see longer duration notes and bonds trade at such low yield, given the high supply. The government figures to add heavily its debt supply by issuing over $2.5 trillion worth of debt by the end of this year. Even with the Fed's treasury buying program in place, the market may have a difficult time digesting all of the government loans. If the equity markets can mount sustained rallies and economists can begin to see the light at the end of the tunnel for this downturn, demand may begin drying up much faster than the Fed can act. Not only would domestic investors with renewed appetite for risk shed their safe haven assets for instruments offering higher returns, but foreign investors may begin to hit the exits as well. The US Dollar has acted as a safe haven for foreign investors during the economic downturn and it seemed as though the greenback kept strengthening with every dismal economic report. Much of this inflow to Dollars was via the treasury market, making T-Notes and US Bonds especially vulnerable if foreign investors repatriate funds. The economy is far from being out of the water and this bounce in the stock market may be a mirage, but traders have to ask themselves how low yields can go. Even if the stock market goes into another tailspin, the upside potential for treasuries is limited due to the very low yields.
Traders skeptical of a move in the June T-Notes beyond recent highs near the 125 mark, but unsure as to the direction of the market may choosing to employ a bear call spread by selling the May 125 call and buying the May 127 call for a credit of 0-30. This trade has a maximum profit potential of $468.75, the initial credit, and a maximum risk of $1,531.25 if the price of the June T-Notes rises above 127 on the April 24th expiration date. The breakeven point at expiration would be 125-15.
Technicals
The June 10-Year chart shows the market rebounding from support at 122-285 in the first test of this support area. The bounce has been somewhat lackluster, as prices have moved higher unenthusiastically. The chart appears to be forming a pennant, suggesting a downward bias if the pattern is validated. Momentum and RSI have remained relatively flat, despite the upward price movement, which could be seen as negative in the near term. It is rare to see both of these indicators diverging from price action at the same time, suggesting a downward move could be strong. The 50-day moving average is closing in on a downward crossover with the 100-day average. A downward crossover would be a bearish longer term signal, which could suggest that the long-term uptrend may be nearing an end.
Rob Kurzatkowski, Senior Commodity Analyst
