Jobs Data Weighs on Bonds
Fundamentals
Bond futures sold-off sharply ahead of today's ADP payrolls report, which is expected to show that the decline in the labor market is easing. If today's number is in line with expectations of a 170,000 decline, Bonds could face selling pressure through the end of week, when the non-farm payroll report is released. Coming into the week, Bonds had been rallying due to concerns that the holiday shopping season may be worse than expected, and the buying hit a fever pitch when the market was blindsided by the Dubai news last week. Now that some of the concerns over Dubai's debt have eased, the Dollar has resumed its downtrend, lessening the appeal of government debt. The Treasury Department is releasing the size of next week's auctions today, which are once again expected to be sizable. The combination of a weaker Dollar and high supply could spark selling of treasuries. However, the market could trade sideways or even move higher if the Dollar can gain some footing and the equity market breaks. There does not seem to be any supportive force out there for the Dollar, so a shock for equities around the globe may be needed for the Dollar to find a bit of stability and Bonds to rally.
Trading Ideas
The March Bond has bearish fundamental leanings due to the weaker Dollar, potential improvement in the labor market, and the large supply of treasuries floating around. Technically, traders may have lost faith the Bond contract because of its inability to cross through resistance. Because of the aforementioned factors, some traders may possibly wish to short the March Bond contract at the market, with a protective stop at 123-01 and a downside objective of 118-10. The trade risks roughly $1,500 for a potential profit of $3,250.
Technicals
The March Bond contract formed a doji candlestick on Friday, followed by a sharp down day yesterday. This suggests a bearish reversal. Also, prices were not able to push through resistance at 122-10 in a convincing fashion, making the bearish reversal indication potentially stronger. Longs may have also taken profits due to the overbought conditions on the RSI, which have now come down to neutral levels, as has momentum. The stochastics are still showing overbought conditions, suggesting the market may see further downside in the near-term.
Rob Kurzatkowski, Senior Commodity Analyst
