Treasuries See Renewed Bullish Enthusiasm as the End of Summer Approaches
Fundamentals
"I'm not dead yet!" is not just a quote from a Monty Python movie, but also the cry from those bullish on U.S. Treasury futures, despite the sharp decline in prices since the beginning of the year. Recently, Ten-year Note futures have rallied to highs not seen since May, as the surging equities rally has stalled, causing investors and traders to move funds into perceived "safer" investments. There have been some news stories reporting that the slump in commercial real estate may trigger additional bank failures, which do not help to dampen concerns that the recent economic recovery might be starting to run out of steam. Yesterday's report on Q2 unit labor costs showed a decline of 5.9% on an annual rate, which demonstrates that wage inflation has been muted and is considered supportive to the views that the Federal Reserve will not need to worry about rising inflation for some time. Although the labor market has shown some signs of stabilizing, there are still concerns that U.S. job creation will continue to lag. Yesterday's Automatic Data Processing/Macroeconomic Advisers private-sector jobs survey has the U.S. shedding 298,000 jobs in August, which was above estimates of 215,000 jobs lost. While the number of jobs lost has begun to decline, there are still no signs that the U.S. will move towards actually creating jobs anytime soon. Expectations are that the monthly Non-farm payrolls report to be released on Friday will show an increase in the August unemployment rate to 9.5%. Trading volume in the Treasury market should be light the rest of the week -- at least until the NFP report is released. However, with the 3-day holiday weekend in the U.S. due to the Labor Day holiday on Monday, many of the bond trading desks will empty out by late morning on Friday, as traders take advantage of the end of summer holiday.
Trading Ideas
A quick look at a continuous chart for 10-year Note futures (TY) shows the market has moved into a consolidation pattern just after the recent lows were made back at the end of June. With this week's non-farm payrolls report on tap, many traders like to buy options of 10-year Note futures to either protect existing futures positions or to speculate on a big move in treasury prices if the report varies widely from expectations. This normally has the effect of increasing volatility levels in the options days before the report is released. Some traders looking for Treasury prices to remain range bound may wish to take advantage of any increase in option volatility by possibly selling strangles in TY options. An example of this trade would be selling October 120 calls and selling October 114 puts. With the December 10-year Notes trading at 117-21, this strangle could be sold for 20/64, or $312.50 per straddle before commissions. The premium received is the maximum possible profit from the trade. Given the potentially unlimited loss potential on short strangles, traders who may choose to implement this strategy should monitor their position closely. To help control the risk on the position, some traders may wish to exit the trade early if the TYZ9 futures trade at or above 120-00 or below 114-00 before expiration on September 25th.
Technicals
Looking at the continuous daily chart for the Ten-year note futures, we notice prices have been stuck in a 4-point range, with 119-00 at the top end of the range and just under 115-00 at the low end. Prices have been hovering on both sides of the 20-day moving average, which has chopped short-term momentum traders to pieces. The 200-day moving average looms near the 121-00 level, and longer-term position traders would be hard pressed to be bullish on 10-year Notes until prices close above this long-term indicator. The 14-day RSI remains in neutral territory with a current reading of 54.66. 119-00 is seen as resistance in the December TY futures, with support found at 113-06.
Mike Zarembski, Senior Commodity Analyst
