Long Weekend for Bond Traders on Hold
Fundamentals
Bond traders will be glued to their computer screens Friday morning, instead of leaving early for the beach ahead of the long Labor Day weekend in the US, as important economic data is scheduled to be released at 7:30 am Chicago time -- the widely anticipated non-farm payrolls report for August. Analysts expect payrolls fell by about 120,000 jobs last month, which is a bit better than the 131,000 jobs lost in July. The unemployment rate is expected to tick up to 9.6%, vs. 9.5% in July. Although trading activity may begin to wane once the employment number has been digested, many traders will next likely turn their attention to the release of the ISM non-manufacturing index. It was surprising gains in its sister report, the ISM manufacturing index, on Wednesday that helped trigger a steep sell-off in the treasury futures, as bond bulls rushed to the exits on "good news" from the manufacturing sector. Many traders are looking for the service index to fall to 53.0 in August, which is down from the 54.3 reading in July. However, even if we see a slight decline in the ISM reading on Friday, any reading above 50 still means an expansion of jobs in the sector, although possibly at a slower pace than the previous month. A look at the most recent Commitment of Traders reports shows speculators increased sharply their net-long position in 10-year note futures last week, adding a whopping 74,365 contracts for the week ending August 24th. This increase corresponds to a move to yearly highs for treasury prices, as economic data released at that time painted a gloomy picture for the economic recovery in the US. Since that time, 10-year note prices have fallen below the 20-day moving average, which is viewed by some chartists as a short-term sell signal, leaving recent long positions in the red. This could spur a further bout of long liquidation selling, should this morning's economic data turn out to be better than anticipated.
Trading Ideas
Some traders expecting a large move in the price of 10-year note futures but who are unsure as to the direction the move will take may choose to explore option strategies that could benefit from a large move in the underlying futures. One example of such a strategy would be the purchase of a strangle in 10-year note options. For example, a trader could buy the October 125.5 calls and buy the October 123.5 puts. With the December 10-year note futures trading at 124-20 as of this writing, this strangle could be purchased for about 31/64ths, or $ 484.38 per spread, not including commissions. The premium paid would be the maximum risk on the trade, and the position will be profitable at option expiration in September should the December 10-year note futures be trading above 125-31.5 or below 123-00.5.
Technicals
Looking at the daily continuation chart for 10-year note futures, we notice prices hovering just below the 20-day moving average; the steep upmoved seems to have ended, as prices have began to consolidate just below recent highs. We do have a bearish divergence in the 14-day RSI, as this momentum indicator failed to make a new high reading when prices reached yearly highs on August 25th. The next major support point is not seen until 122-06.5, with resistance found at 126-28.
Mike Zarembski. Senior Commodity Analyst
