Positive Auction Results Bring Out Bond Bulls
Fundamentals
Bond futures are higher for the second consecutive session, after several encouraging Treasury auctions and expectations that inflation may be tamer than previously expected. The yield curve had moved up extremely sharply, but now seems to be flattening a bit after comments from several Fed members indicating that the central bank does not expect to tighten its interest policy anytime soon. This would normally be seen as a policy that could result in inflationary conditions, but China has been tightening its interest rate policy and increasing bank reserve rates in an attempt to prevent its economy from overheating. China has been the engine that has driven many commodity prices higher, so a controlled cooling of its economy could keep commodity prices in check. On the home front, it appears that consumer spending is not coming back with the vigor that many had hoped for, raising the possibility that equities are becoming extremely overvalued. The non-farm payroll number a week ago was especially disappointing given the expectation that the worst may be over for the labor market, which has made Bonds more appealing. While the previously-mentioned factors all seem to favor higher Bond prices and lower yields, the major stumbling block may be the Dollar's exchange rate. A weaker Dollar could lessen the appeal of treasuries and stoke inflation down the road. A firm Dollar, however, could aid a rally in Bonds.
Trading Ideas
Given the improvement in both the technical and fundamental outlooks for March Bonds, some traders may wish to enter the long side of the market. Traders may wish to consider buying the March Bond future at 117-00 or better, with a protective stop at 115-16 and an upside objective of 119-00. The trade risks roughly $1,500 for a potential profit of $2,000.
Technicals
The March Bond chart shows prices holding support at the 115-00 level. The contract confirmed a small double-bottom pattern on the daily chart, hinting that prices may come up to test stout resistance near 118-00. A breakout above the 118-00 mark suggests that prices, at the very least, may trade between 118-00 and 120-00. Support at 115-00 can still be seen as a significant technical level on the downside, with a breach of this level suggesting a test of the 112-00 level. Prices have crossed the 20-day moving average, suggesting that a near-term low is in place. The momentum indicator is nearing the zero line. A crossover can be seen as a bullish indicator.
Rob Kurzatkowski, Senior Commodity Analyst
