Good News for Jobs = Bad News for Bonds?
Today's IdeaFriday, July 8, 2011
With Bond futures prices on the defensive and major support hovering less than a point away, traders with a bearish bent may wish to explore futures options strategies that will benefit from a continued decline in prices. An example of one such strategy would be the purchase of a bear put spread. For example, with September Bond futures trading at 123-00 as of this writing, the September Bond 122 puts could be bought and the September Bond 119 puts sold for 56/64ths, or $875 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential gain of $3,000 minus the premium paid which would be realized at option expiration in August should the September Bond futures be trading below 119-00.
Fundamentals
Better than expected data on the jobless front put Bond bulls on the defensive, as Treasury Bond futures prices continue to decline, hovering just above 2-month lows. On Thursday, the Labor Department announced that new jobless claims fell by 14,000 last week to a seasonally adjusted 418,000. This was a larger drop then many analysts expected and was supported by a 43,000 decline in continuing claims, which now stand at 3,681,000. The employment outlook was also buoyed by the forecast from ADP/Macroeconomic Advisers which reported that private sector jobs increased by 157,000 in June, which is well above the 95,000 jobs analysts were expecting. This positive data may up the estimate for this morning's release of the June Non-farm Payrolls report. The current estimate is for an increase of 80,000 jobs last month, which would be up from May's totals and a 54,000 increase. Signs of an improving labor picture are adding support to equities at the expense of Treasuries, as investors move assets towards more "risky" investments. In addition, Oil prices are once again approaching the psychologically important $100 level, which may spark inflation fears, especially if there are signs of improvement in the labor sector. As the" deadline" approaches for Congress to raise the debt ceiling, there are some reports of "compromise" from both sides, which has many traders feeling more confident that a deal to address the budget deficit will be reached. This could translate into more funds being moved into equities, or even commodities, and away from the "safe haven" of Treasuries and the US Dollar.
Technical Notes
Looking at the daily continuous chart for Treasury Bond futures, we notice prices have fallen below both the 20 and 200-day moving averages. In addition, there appears to be a "bear flag" formation occurring during the past few sessions, as prices have moved off the recent lows, but on lower than average volume. This technical pattern will be confirmed should prices move lower and trade below the lower trend-line of the "flag" on high volume. The 14-day RSI has turned lower, with a current reading of 40.93. Support for September Bonds is seen at the June 30th low of 122-05, with resistance found at the June 24th high of 127-01.
Mike Zarembski, Senior Commodity Analyst
