Signs of Foreign Interest Spur Bonds
Today's Idea
The large sell-off that the Bond market has seen in recent months suggests that some investors could see Bonds as an attractive investment. Yields are at their highest levels since the first half of 2010, and traders could see equities and commodities as being a bit toppy, at least in the near-term. The chart shows large intra-day moves without a direction for much of the month. This could be a sign that the market could turn. Some traders may wish to consider buying a March Bond contract on a stop at 122-16, with a protective stop at 120-16 and an upside objective of 125-00. The trade risks roughly $2,000 for a potential profit of approximately $2,500.
Fundamentals
Bond futures have found recent stability near the 120-00 level, after dropping 15 handles over the past three months. The strength of the 7-year note auction yesterday was fueled by bids from overseas. This is the strongest demand from foreign investors in a year and a half, and the indirect bidders accounted for almost two thirds of purchases. Yields are at their highest levels in months, and traders could be hedging themselves against a possible decline in equity prices in the New Year. The rise of commodity prices has been a major source of selling pressure for the treasury market. Many commodities still face extremely tight supplies because the chaotic weather of 2010, but the rise in prices could begin to hamper economic progress. China has already taken steps to cool the boom of raw material prices, which could make the Bond market an attractive alternative to traders looking to avoid equities. If commodity prices are unable to be contained, then the Bond outlook would likely be negative, as inflation would dictate higher yields.
Technical Notes
Turning to the chart, we see the March Bond contract trading in a wide sideways pattern. There is no indication as to whether this is simply consolidation before making another move lower, or if the market is poised to make a reversal. A move above 122-16 could be seen as a double bottom on the chart and cold signal a move into the mid 120's. A close below the relative low of 119-02 could be a sign that the market is heading toward 115-00. Prices are nearing the 20-day moving average. A close above the average would suggest that a near-term low may be in place. Momentum is showing bullish divergence with price and RSI, hinting at near-term strength.
Rob Kurzatkowski, Senior Commodity Analyst
