No Safe Haven
Fundamentals
Bond futures had sharp declines yesterday, as investors' appetites for government debt continue to wane. Yesterday's auction of 5-year notes drew a yield of 2.605 percent, versus consensus estimates of 2.556 percent, which likely indicates lackluster demand. The auction showed the lowest demand for US debt in 8 months. The poor showing by foreign investors can largely be attributed to China, which may be retaliating against efforts from US lawmakers to force the country to float its currency. One could expect today's auction of 7-year notes to have lackluster demand, which could push yields higher. Bond futures have priced-in higher yields, indicating that another poor showing may not have a great influence on price action today. Treasuries could actually be seen posting gains if the results of the auction are only moderately worse than expected, as the shock hit the market yesterday. Government debt, in general, may be entering a period of lackluster demand. Global equity markets continue to slowly creep higher, and the fallout from the Greece debt situation continues to spread. Rating agencies could be watching sovereign debt closer these days, and we have seen a downgrade of Portuguese bonds by Fitch, citing a sharp increase in debt. Traders have feared a similar fate for US debt, which could cause yields to increase. This may make investors a bit gun shy at the present moment.
Trading Ideas
The fundamental outlook for Bond futures remains negative, especially if China continues to push back against pressure to raise the value of the Yuan. However, the downside on the Bond contract may be limited unless the FOMC decides to raise rates, which is extremely unlikely in the near-term. Some traders may wish to look to the chart to determine market direction. If the June Bond contract is able to hold support between 115 & 116, some traders may possibly wish to buy the futures, with an upside target of 118-00 and a stop at 114-16. The trade risks between $500 and $1,500, depending on point of entry, with a profit target of between $2,000 and $3,000.
Technicals
Turning to the chart, we see yesterday's sharp selloff in the June Bond contract taking prices down to minor support at 116-00, the trigger line from the previously confirmed double-bottom. In order to signal a downside breakout, prices would have to fall below major support at 115-00. If prices gain traction between the 115 &116 levels, prices could remain range-bound for the foreseeable future, with 119-00 likely the upper boundary of the range. The oscillators are neutral at the moment.
Rob Kurzatkowski, Senior Commodity Analyst
