Mixed US Unemployment Report: Trading Ideas For The Bond Market

Fundamentals

The non-farm payroll results were mixed, with a smaller than expected decrease in jobs for the month of August, but a larger than expected increase in the unemployment rate. This has led to choppy trading in treasuries, as traders try to digest and interpret the data and what impact it will have on the economy going forward. The report may have a slightly bullish tilt for the treasury market in the near-term, as the V-shaped recovery some were expecting for the labor market may be stalling near the bottom. The rise in the equity markets seems to be a bit overdone at the moment, which can be seen as a bullish force for treasuries.

On the other hand, Gold prices have seen a significant bounce due to a weaker dollar and perceived value, which has hurt demand for Bonds and Notes. The fact that treasuries and precious metals have been on an uptrend since mid-August shows that there is still genuine concern about the economy because consumer spending and unemployment remain huge question marks. Bond traders will look to next week’s auctions to provide further guidance. Barring a failed auction or a surprise spike in rates, Bonds seem to have a bullish bias going into the auctions.

Trading Ideas

Some traders may wish to consider taking a cautious approach ahead of next week’s auctions and choose to enter into an option trade instead of the futures market. The fundamentals and technicals seem to favor more upside. Some bullish traders may possibly wish to enter a bull call spread, buying the October Bond 121 call (USV9121C) and selling the October 123 call (USV9123C) at a limit of 0-35, or $546.88 to the buy side. The trade risks the initial debit of $546.88 for maximum profit potential of 1-29, or $1,453.13.

Technicals

Technically, The December Bond contract has been in an uptrend since mid-August. Today’s lows have held the uptrend line thus far, suggesting the trend may continue. The lows also tested and held newly established support near the 120-00 mark. The momentum indicator is showing bullish divergence from both price and RSI, favoring a bullish bias. The RSI continues to hover near overbought levels, and the stochastics are still overbought - both of which could hinder further price advances.

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