When the Going Gets Tough, Traders Turn to Treasuries!
Friday, August 19, 2011
With Bond prices moving parabolic, it's important to be mindful of the so called "gravity effect", when prices can fall fast and far when a sudden price move comes to an end. That being said, trying to pick a top by selling futures could end up being more of a risk then most traders can stomach should the price rise continue. Those traders who think Bond prices may be near a peak may wish to consider exploring the purchase of an out-of-the-money put in Bond futures options. For example, with the December Bonds trading at 138-00 as of this writing, the December Bond 130 puts could be bought for about 1-26, or $1,406.25, not including commissions. The premium paid would be the maximum potential risk on the trade and would be profitable at option expiration in November should the December Bonds be trading below 130-00 plus the amount of the premium paid.
Fundamentals
Yogi Berra may have said it best as it's "déjà vu all over again" for Bond traders, with the lead month Bond futures hovering ever so close to the all-time highs seen back at the height of the 2008-2009 economic crisis. This time, economic concerns generating the "flight" to US Bonds are more widespread, with many investors nervous about the continuing sovereign debt crisis in Europe and the exposure of major European banks to this debt. In the US, we are continuing to see weaker than expected economic data coming out with little in the way of a concrete plan out of Washington to deal with the economic malaise and rising government debt. It is likely this continued uncertainty that is drawing investors to bonds despite low yields. The US ten-year Note actually fell below a 2% yield for the first time in history on Thursday, showing how investors are willing to receive miniscule returns for the assurance of "safety". Gold is the other market that has benefited from the current "risk-off" mentality, with another new all-time high made yesterday. Thursday's session was particularly volatile, as traders digested a slew of disappointing data, including a weaker than expected initial jobless claims figure (408,000 vs. 399,000 last week) and the Philadelphia Fed August Business Index which fell to its lowest reading in two years, plunging to -30.7, vs. expectations of +1.5, and well below the + 3.2 reading in July. If that wasn't enough, existing home sales also fell to their lowest levels of 2011 last month. The rise in Treasury prices does seem to have the earmarks of a "bubble", with prices moving in a parabolic fashion this month. But unless something is done to assure nervous investors and traders that our global political leaders will take the necessary steps to calm the fears of a global economic recession, assets may continue to flow into the US Treasury market. At some point in the future the Bond market "bubble" may also burst, however, especially if the "solution" to the debt crisis is a "monetization" of this debt, which would increase the odds of sharply higher inflation in the future.
Technical Notes
Looking at the daily continuation chart for US Bond futures, we see the latest run-up in prices has come close to the highs made back in December of 2008, but has not moved above this major resistance hurdle. If we do not see a move to new highs shortly, a potential "double-top" formation may be in place, which could signal an end may be near to the bull-market run in Treasury prices. The 14-day RSI has moved into overbought territory, with a current reading of 71.63. The last time Bond prices were at these lofty levels, the correction took the market down nearly 30-full points! The next resistance point for September Bonds is seen at the December 18th 2008 high of 141-28, with support seen at the August 9th low of 132-27.
Mike Zarembski, Senior Commodity Analyst
