QE2.5 Lifts Treasuries
Thursday, September 22, 2011
The Fed's decision to purchase longer-dated T-Notes and Bonds may have a positive impact on Note prices for an extended period of time, as the purchases are slated to last into June. Weak economic conditions may also prompt some traders to head toward higher ground and seek the safety of treasuries. Technically, the Dec 10-Year is still trading in the sideways consolidation pattern between 129-16 and 131-10. Given the fact that the scope of a potential upside breakout is unknown, some traders may possibly wish to explore selling a put option. For example, some traders may want to consider selling an Oct T-Note 129.5 put (TYV1129.5P) for 0-32, or $500. The maximum profit would be the premium received and this trade would have unlimited loss potential. Some traders may look to exit the position on a close below 129-16 to mitigate this risk.
Fundamentals
10-Year Notes are not at record low yields after yesterday's FOMC announcement. The rate decision was once again a non-event, but the statement had a fairly grim assessment of economic conditions. The Fed also stated that they would purchase longer-term treasuries over short-term bills, which is going to provide additional support for T-Note and Bond prices. The move will also have a negative impact on longer-dated interest rates, causing the yield curve to flatten further. Treasuries may have an advantage over physical commodities in the near-term in light of the heightened economic concerns. The Fed is taking a big gamble by lowering long-term rates to stimulate economic conditions. The low interest rate environment puts the economy at significant inflation risk long-term. Yields may also rise quickly once the Fed purchases end in June.
Technical Notes
Turning to the chart, we see the June 10-Year Note trading toward the upper end of the sideways consolidation pattern between 129-16 and 131-10. Closes above 131-10 may signal a new breakout. The upside potential for Notes remains unknown, given that we are in uncharted territory. It is also of interest to note that the RSI indicator has been diverging from prices since early to mid-August. This can be seen as bearish longer-term, and the pattern may take an extended period of time to play out.
Rob Kurzatkowski, Senior Commodity Analyst
