Bond Rally Takes a Breather Ahead of Mid-term Elections and November FOMC Meeting
Fundamentals
After rising by nearly 20-full points since April of this year, the 30-yr Bond futures rally looks a bit tired lately, and prices seem to have entered a consolidation phase. Many traders have pared back their position in treasuries ahead of the November 2nd mid-term elections here in the U.S., along with the upcoming 2-day Federal Open Market Committee meeting (FOMC) scheduled for November 2nd and 3rd. The FOMC meeting will be highly anticipated by traders looking for comments regarding the possible start of quantitative easing 2 (QE2) and an indication regarding what level of Bond purchases the Fed may undertake. It appears that the futures markets are anticipating a minimum of 500 billion in Bond purchases by the Fed, although there has been some speculation that the Fed will be more "conservative" and stagger the amounts purchased as conditions warrant. With U.S. mid-term elections less than two weeks away, it is possible the Fed may hold off on any announcement of QE2 at the November meeting to avoid the appearance of favoring any one political segment. Any "inaction" may not be favorably viewed by Bond bulls, especially after the market has "priced-in" more aggressive Fed actions. Even if the Fed does announce Bond purchases, the set-up for a "buy the rumor and sell the fact" scenario could emerge and cause further long liquidation selling. It certainly appears that Bond bulls will need "fresh fuel" to keep the Bond rally going, whether it is a larger than expected size of QE2 or even "currency intervention" from the Bank of Japan, which would bring in U.S. dollars and would most likely be funneled into U.S. treasuries. But a catalyst will be needed to break the Bond market out of its current price range.
Trading Ideas
The old saying "the calm before the storm" could apply to the Bond futures market the next couple of weeks, especially after the FOMC meeting and the upcoming elections are over. Some traders looking for a potential price breakout from the current consolidation may wish to explore the purchase of a strangle in Bond futures options. An example of this trade would be buying the December 30-yr Bond 134 calls and buying the December 130 puts. With the December futures trading at 131-20 as of this writing, this strangle could be purchased for about 2-28, or $2,437.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade; with the position profitable at option expiration in late November should the December Bonds be trading above 136-14 or below 127-18.
Technicals
Looking at the daily continuation chart for 30-yr Bond futures, we notice the market quietly moving sideways after the steep run-up at the end of summer. Prices are now below the short-term 20-day moving average, which favors short-term Bond bears, but still above the longer term 100-day moving average, favoring the bullish longer term trend. Momentum has turned down, with the 14-day RSI currently reading 43.97, which is well below the 75.00 plus readings we saw back in August. Support for December Bonds is seen at the 100-day moving average near the 129-26 area, with resistance found at the October 6th high of 135-12.
Mike Zarembski, Senior Commodity Analyst
