Friday, January 2, 2015
Speculators, both large and small, are starting to amass a rather large net-short position in 10-year Treasury Note futures. The most recent Commitment of Traders report shows a combined net-short position by non-commercial and non-reportable traders of 433,399 contracts as of December 23rd. This was an addition of over 23,000 contracts for the reporting period. While the net-short position is not yet at extreme levels, it does reflect the mindset of traders that longer-term interest rates are due to rise as we head into 2015.
To say that interest rate prediction is an inexact science is a bit of an understatement, as nearly every major analyst on Wall Street that gave a prediction for U.S. Treasury yields for 2014 missed the ultimate direction of rates. Analysts were generally looking for yields on 10-year U.S. Treasury Notes to be in the vicinity 3.40% by the end of 2014. However, as of this writing at 11:30 am Chicago time, the yield on the 10-year note is 2.17%, with a yearly range of 3.034% way back on January 2nd to a low of 1.868% on October 15th.. Now as 2015 rapidly approaches, we are already hearing that analysts are -- you guessed it -- sticking to their beliefs that yields will rise, with an average guesstimate of just over 3.00% by the end of 2015. So why were market pundits so wrong on their interest rate predictions for 2014? Well, the biggest reason was divergence in economic conditions between the U.S. and Europe, where deflation concerns in Europe forced the European Central Bank to expand stimulus measures that, in turn, forced yields for most European bonds to decline, with many now trading at yields below that for U.S. Treasuries. This made U.S. rates more attractive to non-U.S. buyers, despite what are still historically low rates. Now that it appears that the Federal Reserve is prepared to raise interest rates sometime in 2015 and there are signs of improving U.S. economic growth, it appears that the pieces might be coming into place to see longer-term Treasury yields begin to rise from historic lows. However, as 2014 proved, one cannot be certain that outside events will once again postpone the end of the Treasury bull market and have bearish traders once again proclaim "wait until next year!"
Looking at the weekly continuation chart for 10-year Note futures, we notice that the uptrend line drawn from the 2007 lows has failed to hold, as prices have moved into a consolidation phase. Prices are currently hovering between the 20- and 200-day moving averages, with prices generally holding within a 6-point range for most of 2014. The 14-week RSI is neutral, with a current reading of 53.34. Support is seen at the September 2013 low of 122-07, with resistance found at the October 2014 "spike" high of 130-17.
Mike Zarembski, Senior Commodity Analyst