Speculators Shun Bull Market in Bonds
Fundamentals
Bond market participants are taking a breather, with prices near contract highs, as traders prepare for the highly anticipated non-farm payrolls report for September which is scheduled for release Friday morning at 7:30 am Chicago time. Traders have received mixed data as to the state of the jobs market in the U.S., with the ADP/Macroeconomic Advisers National Employment Report showing that private-sector employment fell by 39,000 jobs in September, which is well below the +20,000 jobs most analysts were expecting. However, Thursday’s release of the weekly U.S. jobless claims figures was more upbeat for employment, with new claims for jobless benefits falling by 11,000 to 445,000 for the week ending October 2nd. This was the lowest total in nearly 3 months, and set a positive tone for Friday’s report. Current market consensus is for a moderate jobs loss last month, with the average estimate near the -10,000 level. The unemployment rate is expected to move up slightly to 9.7%, vs. 9.6% reported for August. Any major deviation for the consensus in tomorrow’s report has the potential to trigger a sharp move in bond prices. Outside of the employment report, bond bulls seem to have an edge in the fundamentals, with continued talk of a second round of quantitative easing by the Fed, keeping a bid in the treasury market. In addition, the continued rise in the value of the Japanese Yen has traders on the lookout for another round of FX intervention by the Bank of Japan (BOJ) to weaken the Yen by entering the forex market to sell Yen and buy U.S. Dollars. The dollars that would be obtained by the BOJ may be used to purchase U.S. treasuries, adding a further bid to the market. A look at the most recent Commitment of Traders report shows large non-commercial traders holding a minuscule net-long position of only 247 contracts as of September 28th. This information can be interpreted that the bond rally may have some room to move higher, as the large speculators have not yet embraced the long side of the market and any run to new highs could spur further buying as momentum trading systems enter the market.
Trading Ideas
As I talked about in Wednesday’s Xpresso, buying a market near its contract highs can be difficult to do, but in a strong trending market, the difficult trade is often the best trade. Some traders looking to take a bullish position in 30-yr bond futures but who wish to limit the potential risk may want to explore the purchase of a bull call spread in bond futures options. For example, with December bond futures trading at 134-21 as of this writing, one could buy the December 135 calls and sell the December 140 calls for about 1-44, or $1,687.50 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5000 minus the premium paid realized at option expiration in late November should December bonds be trading above 140-00.
Technicals
Looking at the daily continuation chart for 30-year bond futures, we notice prices have rallied over 20 full points since the yearly lows were made back in April. Until the past couple of months, the uptrend has been rather orderly, with increased volatility occurring only after the recent highs were made in late August and early September around the 136-16 area. If we draw a trendline from the April lows, we note that the front-month futures would need to trade below 131-00 to put a serious dent in the bull trend. Below this level, we find strong support at the September 13th lows of 129-05. Major resistance is found at the August 31st highs of 136-20, and should this resistance level be taken out, a potential test of the 2008 highs above 141-00 would not be out of the question.
Mike Zarembski, Senior Commodity Analyst
