You have seen a healthy backup in Treasury yields in the 7 sessions since the FOMC meeting, although the meeting itself was not in any way the driver. This will be a seminal week for whether that move continues or becomes a footnote to our long love affair with the zero boundary.
Last week the market failed to deliver on Friday as had been implied earlier in the week via FOA/TY structures, but still did some good work at backing up yields by session’s end. In a nutshell, the week ended with the shorts still in control, longs looking to explain the move. As we pointed out leading up to the report, one release in this series would not impact the market, and there were/are bigger forces at play.
Seasonals, the Chinese/Asian holidays, and mis-interpretation of the short base all allowed the bears to maintain control through the week. True to form, any weakness in the NFP report (i.e., initial headline without revisions) produced a bounce that was almost instantaneously sold by asset managers and hedge funds. Confirmation of a continuation for the move, if not the trend, came from another healthy increase in TY open interest on very good volume Friday. Monday (CME futures were actually open) along with today again saw market struggle to rally in risk off days again, another positive sign for the short base.
So we have even greater comfort in holding to our view of seeing 3.3% in 10s, 3.47% in cash 30s around this week’s supply schedule for Treasuries; the 30s are virtually right there, the 10s have come close. Had cash been trading on Monday, you theoretically would have tagged 3.2625% in cash 10s on Sunday night. Even here at 3.22%, still within striking distance of 3.3% ahead of the long end Treasury supply (Weds afternoon for the 10s, Thursday for the 30s).
From a purely technical perspective for futures, since TY and FV contracts put in their low for the move on Sunday night when there was no real trading, expect a retest of those levels (117-13+ in TYZ, 111-26+ in FVZ) before one would look for a legitimate low. Classic bonds (US) are different; they made their low for the move this past evening. Still, it would be an extremely rare occurrence for the futures’ contracts to put in any type of meaningful low when cash was closed (i.e., holiday Sunday night US time).
This week’s big events are interesting. PPI will bear watching on Wednesday, but it’s the following day’s CPI report that will really be in play. Another miss this month on the scale of last month’s will be a large problem for the shorts. Evans, Bostic, and Quarles all speak AFTER PPI gets released. Just as important is US supply, with 3s (new) and 10s (last reopening) on Wednesday and 30s set to be reopened on Thursday. Not to be forgotten, Italy will dump a double dose of long end supply on the market before most US traders wake up on Thursday. The second most bearish seasonals period of the year wraps up after this weekend as well. You see my bullish sprouts there?
So to recap, think we still get a push to 3.3% in cash 10s, but would cover shorts against that print and definitely have most shorts covered sometime between Wednesday afternoon and late night Thursday; market will tell us soon enough after that whether the backup pain is over or not. Like the idea of staying long some gamma here, but that gets a little dicey if we do base later in the week and rally back, with a flattener even more painful! If this analysis is correct, should get pretty close to 3.3% print in cash 10s but think you are supposed to come out of this week long, at least for a trade, and then we’ll see what the market is really looks like. For the first time in a few weeks, EMEA real money joined Asia ex-Japan RM in lifting some belly and more spread products. The only covexity hedging has been pipeline and REIT related, and Italy is still waiting to add pressure to EM economies. Might be wrong, but 3 1/4% seems like a lot of yield here for the risk.
As for levels this week in cash 10s, watch resistance at 3.30%, 3.32%, 3.39%, 3.505% (.618 extension of the last move); support comes in at 3.22%, 3.18%, 3.115/3.125% (.618 retracement of the move). In cash 30s, resistance comes in at 3.45%, 3.52%, 3.565%, 3.62% (.618 extension of the move); support comes in at 3.39%, 3.34%, 3.27% (.618 retracement of the move). In TYZ futures, watch this 117-04+/05 level, as that should correspond to 3.3% in cash 10s. Apart from that, support comes in at 117-13+, the 117-04+/05 level, 116-28, 116-20, 116-14 (.618 extension of the move). Resistance will come in at 118-01+, 118-11, 118-13 (.618 retracement of the move), 118-16.
In the meantime, have a good start to your week,
mjc