By Default
Fundamentals
Bond futures have found support recently due to the stock market being a bit shaky recently and a continuation of the Greek financial turmoil. Many traders and analysts would like to get the turmoil in Greece past them, but unfortunately, the EU resolution has failed to calm fears of a default. There is a growing contingent that believes that the scenario that the nation finds itself in is not the exception, but rather the rule. Traders have even questioned whether the debt structure of so-called economic superpowers will result in similar crises on a larger scale. Despite the huge amout of debt the US has written, many investors still view US treasuries as a defensive instrument and the last line of hope if the world suffers a severe setback. There is also some doubt creeping in whether inflation will be a major force, as previously expected, the logic being that the world economy is so fragile at the moment that a sharp rise in the price of raw materials may curb growth enough to quell demand. Bonds have found buyers just when it appears the market is on the verge of breaking down due to these outside factors. The treasury market fundamentals do seem to support lower prices, if for no other reason than the sheer size of the current supply. The grade of US debt has been questioned by many overseas investors, but despite these concerns, these same investors seem to be the ones that flock to US Bonds during periods of duress. The Bond market figures to continue finding support until the Greece situation is finally put to bed and the US Dollar falters. Its upside potential also seems limited, barring the unforeseen, due to expectations that the Fed may begin tightening soon.
Trading Ideas
Given tomorrow's FOMC rate decision, some traders may wish to sit on the sidelines and wait for the chaos following the announcement to settle down before entering into a strategy. The Bond market may continue to be choppy for the foreseeable future, given the tug of war between poor fundamentals and defensive plays. Some traders may look for a shorter term trade, such as buying the June futures contract on a solid close above resistance at 118-00, with an upside objective of 120-00 and a stop at 117-00. The trade risks roughly $1,000 for a potential profit of $2,000.
Technicals
Turning to the chart, we see the June Bond contract briefly trading below critical support near the 115-00 level, only to turn around and bounce back to near-term resitance near 118-00. There is fairly stout resistance between 118 and 121, with relative highs at each full point. Prices have closed above the 50-day moving average for the last four sessions and are testing the 100-day average. Several closes above the 100-day moving average suggests prices could test the upper end of the resistance band. Failure to hold the average suggests the rebound may only be temporary and that the June contract may come back down to test support at 115-00.
Robert Kurzatkowski, Senior Commodity Analyst
