Friday, March 1, 2013
The upcoming round of forced government spending cuts seems to be drawing some moderate buying interest in 10-year Note futures, as some investors are showing concerns that prolonged cuts could slow U.S. economic growth. In addition, the revised estimate for Q4 GDP came in at 0.1%, which was well below average estimates of 0.5%. Slower growth rates may keep the Federal Reserve in an easing mode for an extended period of time, especially if government spending cuts remain in place.
Treasury futures are struggling to hold on to recent price gains, despite weaker than expected durable goods orders in January and the looming across-the-board government spending cuts. Some traders seem to be shaking off any concerns about sequestration and moving back into "risk assets" such as equities on the belief that we may see stronger economic growth in the coming months. Federal Reserve Chairman Ben Bernanke, speaking to U.S. House members on Wednesday, stated that there appear to be signs of improvement in the housing sector, as well as both consumer and business purchases, despite January's 5.2% decline in durable goods orders. Some traders also took some solace in the results of Italy's bond auction, in which EUR 4 billion of 10-year bonds were sold, although at a higher rate than the previous auction. The fact that some investors were willing to purchase the maximum amount of the offering, despite uncertainly regarding which political faction will finally gain control of the Italian government after recent elections failed to provide a clear consensus, helped lessen fears of more instability for the Euro zone. The long end of the curve was showing the most weakness, as Chairman Bernanke told lawmakers that the Fed might start to review an exit strategy from current monetary policies soon, though he stressed that the Fed was not in any hurry to lter its current easing monetary stance.
Looking at the daily continuation chart for 10-yr Note futures, we notice that a trendline drawn starting at the July 25th 2012 high and extending through the intermediate high made on November 16th shows key upside resistance lies less than a ½ point move from the current price level. The recent rally has also been constrained by the 200-day moving average, currently hovering near the 133-04 level. The 14-day RSI is strong, but has not yet reached overbought levels, with a current reading of 65.92. Specifically for the June contract, which is now the lead month for 10-yr Note futures, we see resistance at 132-03, with support found at 130-26.5
Mike Zarembski, Senior Commodity Analyst