A Negative Picture For US Treasury Notes

Fundaamentals

T-Note futures are slightly lower this morning ahead of this morning’s retail sales report, which is expected to show retail sales for the month of April unchanged from March’s figure. The figure is expected to show a modest increase of 0.2 percent when excluding auto sales. If the report turns out as expected, it could further boost demand for equities and commodities at the expense of treasuries. There has been much guarded optimism of late surrounding the housing and labor markets, which have shown signs of bottoming. Up to this point, retail sales have not shown an indication that the worst is over. Spending by the American consumer has helped to lift the global economy out of recession before and there is now hope that consumers may, at the very least, help stabilize conditions.

There are still pressing issues that could prevent a turnaround, such as relatively tight credit markets and high unemployment, which would reduce the buying power of consumers. It seems as though the seeds of a bottom have been planted, according to former Fed Chairman Greenspan, but the questions is whether they will grow or shrivel up and die.

The resilience shown by the equity markets of late coupled with reductions in the Fed’s buying of treasuries have painted a negative picture for treasuries. The actions taken by the government to stabilize the economy will inevitably result in inflation down the road, further lessening the appeal of fixed income products that tend to under-perform in inflationary times. We have already seen a breakdown in 30-Year Bond prices, suggesting 10-Year T-Notes may follow suit.

Trading Ideas

Given the strength of the equity markets and bearish fundamentals, traders may wish to be short the June 10-Year Note on a solid close below the 120-085 mark. To protect the position, traders may want to place a stop at the 121-20 level, which would risk somewhere in the neighborhood of $1,600. Traders that are short could look to exit the the position at a target of 117-00, which puts the possible reward in the range of $3,000. An alternative to to stop/target limit strategy would be to place a reverse collar, buying the June 122 call and selling the 117 put for a debit of 10 ticks, or $161.25. The risk would be roughly $2,000 in this scenario, with the profit target remaining in the $3,000 range. One consideration with the reverse collar is that the market would have to move very sharply in a short period of time, as the options contracts expire May 22nd.

Technicals

The June 10-Year Note chart shows prices remaining above the March relative low of 120-085. Prices bounced after forming a spinning top candlestick around this level, but the June contract remains vulnerable. The bounce may also be attributed to the oversold conditions on the 14-day RSI. A downward breakout below 120-085 could send prices tumbling into the mid teens, while holding support suggests that the market could remain trapped in a range between 121 and 124. The 20-day moving average has acted as resistance for the past month and prices are closing in on the average once again. A close above the average could suggest that a near-term low is in place and can be seen as bullish short-term.

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