Bonds Lose a Safety Net
Today's Idea
Bonds have been a safe haven for investors in recent months, due to dimmer economic forecasts, weaker commodity prices and economic unrest in Europe. Some traders have become a bit more optimistic and may believe that the sell-off in commodities could be a bit overdone. The end of QE2 also removes the safety net and price support for the Bond market. Technically, Bonds have finally showed some chinks in their armor. Some traders may wish to consider entering into a bear put spread, for example, buying the August Bond 123 put and selling the August 121 put, for a cost of 0-35, or $546.88. The trade risks the initial cost and has a maximum profit of $1,453.12 if the price of the Sep Bond closes below 121 at expiration.
Fundamentals
Treasury futures have seen selling pressure over the past several sessions on renewed optimism over Greece and a rebound in equity prices. Stocks have rebounded strongly over the past three trading sessions, after the E-mini S&P came down near the 1250 level. The progress made by passing the Greek austerity measures may prevent a default for now. Many traders view this as a move to buy time for Greece and other distressed European nations, such as Spain, Portugal, Ireland and Italy. Many observers do not see a situation where Greece becomes a functional, solvent economy anytime soon. What the austerity measures and bailout do is prevent skyrocketing interest rates from hitting the EU, and it staves off contagion. Bonds have been extremely strong since April, when many factors were lining up for treasuries. Bond traders now have to come to grips with the fact that the Fed will no longer be there to support the market after the treasury purchases are completed. Commodity prices, most notably Crude Oil, have also rebounded in recent trading sessions. The fact that the worst case scenario did not happen in Greece has many traders looking to higher yielding assets once again at the expense of treasuries.
Technical Notes
Turning to the chart, we see the continuous Bond chart falling below the relative low at 123-28. This relative low was seen as a support level for Bond prices, and the next area of support comes in near the 122-00 level. The close below the 50-day moving average can be seen as a negative technical factor for Bond prices, but the true test will come from the 100-day moving average, which sits at 122-10 coming into trading today. A close below the average and support at 122-00 could be seen as especially bearish.
Rob Kurzatkowski, Senior Commodity Analyst
