Treasury Bond Sell-off Stalls, at Least for Now!
Fundamentals
Treasury bond bears have been stymied once again, as fresh selling failed to materialize once technical support was breached. Front month Bond futures prices fell to their lowest levels since June of 2009, as traders have increased the chances of a Federal Reserve interest rate increase later this year. Much of this optimism is tied to improvements seen on the economic front, especially the gain in U.S. employment last month. Continued signs of an economic recovery should lead the Fed to raise interest rates, with traders now pricing-in a possible rate increase as soon as the September 21st meeting. Although the longer-term trend seems to favor higher treasury yields/lower bond prices, ten-year note yields reaching 4% have attracted buyers -- especially from outside the U.S., as overseas investors look for a "safe haven" in which to invest their funds -- particularly given the continued uncertainly seen in Europe and the Greek debt situation. A rising U.S. Dollar is also helping to make U.S. treasury investments attractive, as a rising Dollar can offset some of the risks of rising interest rates for non-U.S. investors. Many bond traders will now turn their attention to the Treasury's auction of $21 billion of ten-year notes on Wednesday, and $13 billion of 30-year bonds on Thursday, to see if the recent rise in yields will continue to attract buying interest -- especially from Asia, as some traders there begin to lose interest in holding more European debt, given the uncertainty surrounding Greece and other struggling EU nations. If the Treasury auction is deemed successful, it will continue to demonstrate the allure of U.S. investment -- especially in times of uncertainly, and despite the sizable increases in the U.S. deficit.
Trading Ideas
Treasury bond futures prices may be at a crossroads, with the potential for a big move increasing, as bulls and bears battle it out at a key chart support level. Some traders who anticipate a large move in bond prices and are unsure as to the direction of the price move may perhaps choose to investigate the purchase of strangles in 30-year Treasury bond futures. An example of this trade would be buying the June bond 116 calls and buying the June bond 113 puts. With June bond futures trading at 114-21 as of this writing, this strangle could be purchased for 1-48, or $1,750 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, and the trade will be profitable at expiration in May should June bonds be trading above 117-24 or below 111-08.
Technicals
Looking at the daily continuation chart for 30-year bond futures, we notice that prices have tried to rebound after Monday's declines to recent lows of 114-06, after key support at 114-16 failed to hold. Prices are still well below both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI remains weak, with a current reading of 36.87. The next major support point appears at the June 2009 lows near 111-21, with resistance now seen at last week's highs of 116-12.
Mike Zarembski, Senior Commodity Analyst
