How low will yields go?
Fundamentals
Not even yields of less than 3% are keeping investors away from 10-year treasury notes, as lead month September futures are trading at price levels not seen since the "dark days" of the global recession back in the spring of 2009. The recent buying interest seems to be tied to traders' concerns that the economic recovery is beginning to slow. U.S. economic data released this week has done little to alter this view, as reports on durable goods, consumer confidence and home sales failed to provide investors with a reason to be optimistic that economic conditions will improve. In addition, the release of the Federal Reserve's Beige Book this week showed that Fed officials believe that any economic improvements will be slower than hoped for, as the labor market remains difficult. Comments from Fed governors seems to confirm traders' beliefs that interest rates will remain low for some time to come, which is making even relatively low yields for Treasuries attractive, especially given the choppy market seen in U.S. equities. This morning traders will be awaiting reports on 2nd qtr GDP and the Chicago PMI. Both reports are expected to show slower growth has occurred, and if true, will cap a week where even the most optimistic traders looking for economic improvements may start to see that their glass is actually half empty.
Trading Ideas
Few traders can argue that the 10-year note futures market is currently in a bullish phase. However, sub 3 percent yields can make one a bit nervous that prices may be somewhat overextended, especially given the size of the U.S. debt. Some traders who wish to position themselves for a continued up-move in 10-year note futures but who wish to limit their risk should the market reverse, may wish to investigate trading strategies using options on ten-year note futures. An example of such a trade would be buying a bull call spread. With September 10-year note futures trading at 123-19 as of this writing, one can buy a September 10-year note 124 call and sell a 126 call for about 30/64th, or $468.75, not including commissions. The premium paid would be the maximum risk on the trade, with a potential gain of $2,000 minus the premium paid which would be realized if September 10-year notes are trading above 126-00 at option expiration in late August.
Technicals
Looking at the daily chart for September 10-year note futures, we notice that since April of this year, prices have moved steadily upward, with few major corrections along the way. Prices are well above the 200-day moving average and recently broke out above the 20-day moving average, which triggered "buy" signals for many short-term momentum trading systems. The 14-day RSI is positive, with a current reading of 63.46. The recent high of 123-24 looks to be the next resistance point, with support seen at 122-065.
Mike Zarembski, Senior Commodity Analyst
