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Bernanke Fails to Appease Bond Bulls

Thursday, October 6, 2011

Bond bulls were disappointed by Fed Chairman Bernanke's testimony in front of Congress. Some traders were holding out hope of further stimulus, leading to further demand for longer-dated treasuries. Many traders are now focused on economic data, most notably tomorrow's non-farm payroll number, which is expected to show the economy created roughly 60,000 jobs last month. A number meeting or exceeding this target could trigger more aggressive selling of Bonds, while a disappointing number could end the recent slide. From a technical perspective, some traders may wish to consider focusing on the 140-00 level, as a breakout below this number may cause Bonds to fall another five handles or, possibly, more. Some traders may possibly want to enter into a bear put spread in the event that this level is broken. An example of such a trade would be buying the December Bond 140 puts and selling the 135 puts, for a debit of 1-10, or $1,156.35. The trade risks the initial cost and has a maximum profit of $3,843.75 if the December Bond futures close below 135-00 at expiration.

Fundamentals

Bond futures are lower for the third consecutive session, as many investors begin to take on more risk. Yesterday's ADP number showed private payrolls increasing by 91,000 jobs last month, giving equity investors a ray of hope that a double-dip recession can be avoided. Bonds are also lower after Fed Chairman Bernanke gave no indication that the central bank will begin another round of stimulus. The Fed overtook China as the biggest treasury buyer earlier this year. It is difficult to see longer-dated yields remaining this low for an extended period of time, unless the global economy is faced with the worst case scenario - a long, drawn-out period of slow growth. In the short-term, however, the EU's handling of the sovereign debt situation could spark further buying in treasuries, especially if Europe capitulates and cuts-off aid to Greece. This is an unlikely scenario, but the risk of this happening remains as long as Greece fails to meet its targets. Eventually, lawmakers may succumb to political pressure and leave the Mediterranean nation to fend for itself.

Technical Notes

Turning to the chart, we see the December Bond contract failing to break through resistance formed by the September 22 high close of 146-02. The chart may be showing signs of forming a double-top, which would be confirmed by a close below 140-00. If prices are unable to hold this level, support at 135-00 may be tested. Thus far, prices have held above the 20-day moving average, but a close below the average could be a sign that a near-term high has taken place. The momentum indicator hints at possible price weakness in the near-term.

Rob Kurzatkowski, Senior Commodity Analyst