Bond Prices Fall as Non-Farm Payrolls Come in “Better” Than Expected
Fundamentals
There was no joy for Treasury bulls Friday morning after the widely anticipated U.S. Non-Farm Payrolls report for February was released. Non-farm payrolls for February fell by “only” 36,000 in February according to the Labor Department, despite the severe winter weather that affected much of the northeastern parts of the U.S. This was much better than the pre-report consensus of a decline of around 70,000 jobs last month. The unemployment rate remained steady at 9.7%, which was also better than anticipated. One area where the severe winter weather may have had an effect was in the average hours worked, which fell by 0.2 hours to stand at 33.1 hours last month. Bond futures declined after the report was released, as traders sold existing positions that were purchased before the report in anticipation of a much larger decline in payrolls last month. In addition, traders sold bond futures in anticipation of next week’s U.S. government bond and note auction, expected to total $74 billion dollars, with $40 billion of 3-year notes, $21 billion of 10-year notes, and $13 billion of 30-year bonds up for auction. Traders typically sell bond futures ahead of the treasury auction as a hedge against cash purchases. Even though the payrolls report was better than expected, we still had job losses last month, with an estimated 8.4 million jobs having been lost since December of 2007. Until we start to see actual gains in the employment picture, it is doubtful that the Federal Reserve will begin aggressively raising interest rates anytime soon, which will be supportive to the short end of the Treasury yield curve. The long end of the curve could remain under pressure due to rising inflationary fears tied to the huge government deficits the U.S. is running and concerns that bond buyers will require much higher interest rates to continue their purchases of U.S. Government Bonds in the future.
Trading Ideas
A quick look at the daily chart for June 30-year Bonds will show what looks like the development of a trading range pattern with a high boundary of 118-02 and a low boundary of 113-13. Traders anticipating that the June contract will remain within this price range might choose to investigate selling strangles in the April Bond options, with strike prices outside of the above-mentioned boundary. An example of this trade would be selling the April Bond 120 calls and selling the April Bond 113 puts. With June Bonds trading at 116-22 as of this writing, this strangle could be sold for 12/64, or $187.50 per strangle, not including commissions. The premium received is the maximum potential gain in the trade and will be received if June Bonds remain above 113-00 and below 120-00 at option expiration on March 26th. Given the risk involved in selling naked options, traders should have an exit strategy in place should the position go against them, such as closing out the trade early should June Bonds close above 120-00 or below 113-00 before the options expire.
Technicals
Looking at the daily chart for June 30-year Bonds, we notice that the recent rally attempt has been stymied by the better than expected February NFP figures. Prices are trying to hold above both the 20 and 100-day moving averages, but this is proving difficult. The sell-off gives further support to the belief that we may see a more range-bound trade the next few weeks unless we get a major shock either bullish or bearish to the market. The 14-day RSI has turned neutral, with a current reading of 51.35. 118-02 remains resistance for June Bonds, with near-term support found at the recent lows of 114-15 made on February 18th.
Mike Zarembski, Senior Commodity Analyst
