T-Note Reprieve
Today's Idea
March Notes have found near-term solace in the demand from foreign central banks, however, traders remain concerned about inflationary pressure. Rising food and energy prices may be a greater risk to the economy than bank lending at this point. The Fed's stubborn stance may cause swift and extreme interest rate intervention down the road, when the central bank cannot ignore the 800 pound inflationary gorilla any longer. The chart also suggests that the Note market is mired in a downtrend in the intermediate-term, but may find near-term support. For this reason, some traders may wish to consider entering into a bear put spread, buying the March T-Note 118.5 puts and selling the 117 puts for a debit of 15 ticks, or $234.38. The spread risks the initial cost for a potential profit of $1,265.62 if the March futures contract closes below 117-00 at expiration.
Fundamentals
Foreign central banks continue to accumulate precious metals and US government debt in an effort to bolster their balance sheets. Yesterday's 10-year Note auction followed the trend of recent auctions that have shown an increase in central bank bids. The yield on the auction was 6 basis points lower than the consensus estimate. Traders are now left questioning whether the central bank demand can slow the selling pressure coming from speculator liquidation. With the FOMC unlikely to raise rates in the near-term, Note prices seem to have limited downside potential. The Fed seems to be in denial that inflation has made an impact on the US economy. Many traders seem to believe that the Fed is painting itself into a corner with its current rate policy, and that aggressive interest rate increases could be in store down the road, as evidenced by increased yields in longer-dated treasuries.
Technical Notes
Turning to the chart, we see that yesterday's gains are the strongest that the March 10-Year Note has seen this month. The breakdown from the ascending wedge on the daily chart suggests that the market is still in a downtrend. The measured move on the daily chart suggests that the contract may come down to test the relative lows from Last April near the 115-00 level. In the near-term, some traders may interpret yesterday's action to be a short-term reversal pattern. The RSI is near oversold levels, suggesting prices may find near-term support.
Rob Kurzatkowski, Senior Commodity Analyst
