Bond Blitz
Fundamentals
Bond futures continue to slide as a result of the weakening US Dollar and positive economic data. Analysts and government officials alike have been warning investors not to read too much into the positive economic data of late, but that has not stopped the increased appetite for risk. Commodity and stock prices have been surging lately, decreasing investor demand for treasuries. Gold has been much more attractive to investors because of rising commodity prices, as it is often considered a defensive instrument and a hedge against inflation. Both Gold and Bonds have been rallying since August, so something had to give, as both markets tend not to move in the same direction. It now appears that the Bond market is the market that may finally break. Treasury auctions continue to rise in size, which has created a large supply of Bonds on the market. The weakening US Dollar has caused foreign investment in US Bonds to drop, as investors choose to buy domestic government debt instead of US treasuries. Further advances in equities suggest that inflation may be heating up and that the trend of lower debt prices from the past two weeks may continue.
Trading Ideas
December Bonds have faced near-term pressure due to both technicals and fundamentals; however the market may be due for a small corrective bounce in the near-term. For this reason, some traders may wish to consider taking advantage of a small up-move. Traders may possibly wish to buy the December Bond futures at 118-16, with a protective stop at 117-16 and an upside target of 120-16. The trade risks roughly $1,000 for a potential profit of $2,000.
Technicals
The daily December Bond chart shows prices falling below both the 20-day and 50-day moving averages in recent sessions. Furthermore, prices were not able to hold support at 121-11 and 120-00. The next critical support area for the December contract comes in near 117-16, which may determine the intermediate direction of the market -- especially because this level coincides with the 100-day moving average. The stochastics have now reached oversold levels, and the momentum indicator is showing bullish divergence from both price and RSI, suggesting the market may find some near-term support.
Rob Kurzatkowski, Senior Commodity Analyst
