Bond Market Breakdown?

It seems traders are no longer giving much love to Bond futures lately, as prices have fallen below the bottom of the multi-month-long consolidation pattern in the June contract. The resurgence in the equities market has a lot to do with the bond sell-off, as some of the “flight to quality” money that pushed long-term rates to multi-decade lows has moved out of treasuries and back into stocks because there are some signs that the worst of the recession might be behind us.

Another negative affecting bond prices is the huge supply coming to market. This week $71 billion in treasuries are being auctioned off following the $101 billion sold last week. Bond bulls were also disappointed that the Fed did not increase the size of the buyback program from $300 billion it expects to purchase within the next 6 months. That being said, the Fed will not want to see interest rates move up too quickly, as any economic recovery is still in its early stages. This furthers the possibility of additional Fed intervention in the debt markets.

This week also brings the highly anticipated monthly Non-Farm Payrolls report for April, with current estimates calling for job losses near 630,000 last month. Should we see a larger than expected decline in payrolls, traders may being to move back into the Treasury markets, especially if equities react poorly to Friday’s figures.

Trading Ideas

Traders who believe that bond prices may have become a bit oversold and are overdue for a rebound may want to investigate the purchase of Bond futures call options. An example would be buying the July 122 calls. With the September Bond futures trading at 121-00, the 122 calls could be purchased for 2-19/64, or about $2300 before commissions. The premium paid is the maximum risk, and the trade will be profitable if the September Bond futures are trading above 122 plus the premium amount of the

Technicals

Looking at the daily chart for June Bond futures, we notice traders sent Bond prices through previous support of the Feb 27th low of 123-04 just after the FOMC announcement. This sharp move set off a flurry of sell stops just below this level. Prices have now fallen below both the 20 and 100-day moving averages, which has sent a negative tone for both long and short-term traders. The 14-day RSI is weak, but has not yet reached oversold levels with a current reading of 34.91. 120-00 looks to be the next support point for June Bonds, with resistance found at the recent highs of 125-23.

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