Solid Auction Boosts Treasuries
Today's Idea
Treasury market fundamentals will likely be influenced heavily by two intertwined factors: turmoil in the Middle East and possible US consumer spending habits. Technically, the T-Note chart does not show the market finding a trend, but the short-term direction may be higher. Some traders may wish to place a bull put spread, buying the April 10-year Note 116.50 puts and selling the 117.50 puts for a credit of 0-10, or $156.25. The maximum profit would be the initial credit and the trade risks $843.75. Some traders may wish to close the spread in the event that the June T-Note contract closes below 117-16.
Fundamentals
Note prices received a boost from a positive auction, which continued the recent trend of strong foreign demand. The $21 billion auction was the largest auction in 11 months. Some traders and foreign banks may find current yields relatively attractive given the current global state of uncertainty. The world is watching the civil war in Libya and the "days of rage" in Saudi Arabia with keen interest. There is concern that rising Oil prices could hamper economic growth and prices could hit $150 a barrel in the event that the Saudi government is overthrown. In that situation, $200 a barrel is not out of the question. Friday's retail sales and University of Michigan sentiment data will likely be more closely scrutinized than usual. Poor showings in these numbers could trigger further defensive buying of treasuries on the assumption that slowing economic conditions would eventually bring food and energy prices back in like. It would also give the Fed a reason to keep the liquidity coming.
Technical Notes
Turning to the continuous 10-year note chart, we see prices trading at resistance at the 119-00 level. This also coincides with the 20-day moving average. A close above the resistance level and 20-day average suggests price could test relative highs at 120-18.5. The relative high may also serve as a trigger line for a double-bottom pattern. With the resistance near the 121-05 level, many traders may not immediately jump on a double-bottom confirmation. On the downside, the 117-16 level has acted as support, with the market holding this level twice. The bullish divergence between the momentum and RSI indicators hints at near-term strength.
Robert Kurzatkowski, Senior Commodity Analyst
