Can Bond Bulls Avoid Collapse?
Fundamentals
Bond futures are little changed ahead of today's non-farm payrolls number, which is expected to show the US economy losing 175,000 jobs in October. The ADP jobs figure that came out on Wednesday and yesterday's initial and continuing claims data were both in line with expectations, suggesting the non-farm payrolls figure may not deviate greatly from forecasts. A contraction in the job market is never healthy for the economy, but the fact that the pace of the contraction is slowing can be seen as a significant improvement, as it would be the smallest drop in over a year. This could put the Bond market under pressure once again. The yield curve has been steepening, with the spread between short and long-term treasuries at the highest level since the middle part of the year. Next week's record $81 billion in treasury auctions suggests that investor demand may fall short of supply, which could push yields higher. Not only is the Bond market in oversupplied condition, but investors have shown an increased appetite for risk in recent months, favoring equities and commodities over government debt. Unless economic conditions worsen, this trend may persist.
Trading Ideas
There are not many bright spots for Bonds, technically or fundamentally. The December contract, however, has held support at this point, so it may be premature to short the Bond contract before any sort of technical confirmation. Some traders may wish to be patient and see how prices behave near support - others may wish to consider shorting a December futures contract on a significant close below the 117-25 level, possibly with a downside objective of 115-00 and a protective stop at 118-25. The trade risks a little over $1,000, with a potential profit of roughly $2,781.25.
Technicals
Turning to the chart, we see the December Bond contract coming down to test support, which comes in around 117-25. A violation of this support level may result in Bonds coming down to the low teens. The downward crossover of the 20 and 50-day moving averages can be seen as bearish for Bonds. Yesterday's price action centered around the 100-day moving average. Given the fact that Bonds are in the vicinity of support and the 100-day average, this is a critical juncture. How prices behave here will likely seal the fate of the Bond market in the intermediate term. Yesterday's narrow price action did result in a spinning top candlestick, hinting that Bonds may bounce a bit in the near-term.
Rob Kurzatkowski, Senior Commodity Analyst
