Yearend Window Dressing, Risk Lift Bonds
Tuesday, December 20, 2011
Bonds continue to move higher and yields continue to shrink as we approach the end of the year, as many funds look to add quality assets to their balance sheets. Despite the S&P downgrade of US debt and continuous talk of diversification away from the Dollar, many global investors continue to look to the US as a safe haven when the sky is falling. Technically, the March Bond contract appears to be on the verge of breaking out, which could signal a continuation of the uptrend. Buying at these levels, however, can be difficult given the extremely low yields and likelihood that some of the recent buying has been due to window dressing. Some traders may want to keep an eye out for a reversal on the chart, indicating that buying may be subsiding. Some more aggressive traders may perhaps wish to consider jumping the gun, so to speak, and enter into a bear put spread, for example, buying the Feb Bond 143 puts and selling the 139 puts for a cost of 1-00, or $1,000. The trade risks the initial cost of $1,000 and has a maximum profit of $3,000 if the underlying March futures contract closes below 139-00 at expiration.
Fundamentals
There has been no Santa rally for the market thus far, despite the promising start to the holiday shopping season. The tumultuous events in Europe continue to plague the financial and commodity markets. Bond futures have continued to act as high ground for traders looking to avoid the uncertainty of European debt. The collapse in precious metals prices has also shaken the reserve of the Gold bugs and has added to the strength in US treasuries. As yearend approaches, investors will probably come under pressure to add higher quality assets to their balance sheet. We may see a similar phenomenon to the events at the tail end of 2008, when treasury prices spiked as the year drew to a close. The last days of 2011 could see something similar to a lesser degree, given the lofty levels at which Bonds are currently trading. Many traders are now asking themselves what happens next. The beginning of 2009 proved to be a rocky one for Bonds, and some traders may look to protect their downside if these events repeat themselves.
Technical Notes
Turning to the chart, we see the March Bond contract trading up to test the September 22nd high close of 146-02. If prices are able to successfully break through this level, it would signal a technical breakout and suggest that prices are likely to continue to move higher. Failure to break out above this level suggests that prices could continue to consolidate between 140 and 145. The RSI indicator has moved higher, but remains below overbought levels. This suggests that the market could break out prior to becoming overbought, which may strengthen a potential rally.
Rob Kurzatkowski, Senior Commodity Analyst
