No Rest for Bond Traders This Week
Fundamentals
Since reaching lows in June not seen since the 4th quarter of 2007, Bond futures prices have staged a nice rally, gaining nearly 10 points in just over one month's time. However, there are some signs that the recent rally may have run its course. Just yesterday, two widely anticipated government reports were released -- June retail sales and June producer price index -- that were both deemed bearish for Treasury prices. Retail sales increased by a better than expected 0.6% in June, led largely by purchases of gasoline and autos. Excluding the sale of autos, retail sales rose by a much smaller 0.3%. U.S. producer prices rose a stronger than expected 1.8% last month, which is well above the pre-report estimate of a 1.0% rise. The so-called "core" index, which excludes food and energy prices for those who are able to live without these items, rose by 0.5% -- well above the unchanged reading expected by economists. The price gains were widespread, with increases seen in gasoline, furniture, and food prices. This report helped ease the fears of price deflation, which does not help bond prices. Monday's strong stock market rally at the start of the 3rd quarter corporate earnings season sent bond prices lower, as traders are seeing some signs of hope for better than expected results -- especially from the banking sector. Although it appears that the bond bears might begin to exert themselves again, we must remember that the Fed is not finished with its purchases of government debt, with a total of four repurchases scheduled in the next two weeks. This action could support bond prices in the near-term, especially if corporate earnings begin to disappoint. Next up for treasury traders will be this morning's release of consumer prices for June, with the current consensus calling for rise of 0.6% for the headline figure and a 0.1% for the "core" reading. We also have readings on U.S. capacity utilization and industrial production for June, as well as jobless claims and housing starts out later in the week. These reports should keep treasury traders busy -- at least those not on vacation -- no matter how the reports come out.
Trading Ideas
Those traders looking for a correction in bond prices may possibly wish to consider bearish put spreads as a potential trading strategy. An example of this trade would be buying the September 119 puts and selling the September 116 puts. With the September Bonds trading at 119-06, the spread could be purchased for about 1-00, or $1,000 per spread before commissions. The premium paid is the maximum risk on the trade, with a potential profit of $3,000 minus the premium paid if September bonds are trading below 116-00 at the option expiration in August.
Technicals
Looking at the daily chart for September Bond futures, we notice the market making a near perfect 50% Fibonacci retracement from the March 19th highs to the June 11th lows. Prices are holding just above the 20-day moving average, and a close below this widely watched technical indicator could trigger additional selling by short-term momentum traders. Also of note was the failure of bond prices to move above the 100-day moving average. The 14-day RSI has turned neutral, with a current reading of 52.50. Last week's high of 121-115 remains resistance for the September contract, with support found at the 20-day MA, which is currently near 118-04.
Mike Zarembski, Senior Commodity Analyst
