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Bond Range Continues

Posted by Futures on January 27, 2011 9:14 AM

Today's Idea

Bonds may continue to trade range bound due to mixed economic indicators. There does seem to be a slight bias toward the downside, given the fact that many commodities continue to push higher. Some traders may wish to consider taking on a bear call spread by buying the March Bond 124 calls and selling the March 123 calls for a 0-16, or $250, premium to the sell side. The max profit on the trade would be the initial credit, and the total risk would be $1,750.

Fundamentals

The Fed's language did little to help the Bond market, as the March contract shed almost a full point following the FOMC statement. Bonds have had lack direction for over a month due to mixed economic indicators, as well as interest rate uncertainty. The current low interest environment and rising commodity prices indicate that the US central bank will likely have to step in and eventually raise interest rates. The FOMC statement indicated, however, that this may not take place for some time. Basically, you have low rates supporting prices on one hand, and on the other hand, high commodity prices along with the inevitability of higher rates in the futures weighing on the market. Investors have also shown an increased appetite for risk, as evidenced by lackluster demand in treasuries and sagging precious metals prices. The five-year note auction had better than expected results, which helped to stabilize prices. Much of the demand came from overseas investors who are shunning European debt.

Technical Notes

Turning to the chart, we see the March Bond contract continuing to trade in a range between 119 and 122. The failed double-bottom pattern earlier this month may have caused bulls to lose faith. Trading ranges have been tightening, which may be an indication that the market may be poised to finally find some direction. The market has found support at 119-18, as there has not been a weekly close below this level. A weekly close below 119-18 would suggest prices may come down to test 115-00.

Rob Kurzatkowski, Senior Commodity Analyst