US 10 Year Rises On Fear Of Another War Looming

The benchmark 10-Year Note has recorded the largest 3-day gain in over a year following fears that US will engage Syria via military action as soon as Thursday. Fear is certainly in the air, with US stocks falling, Gold and Silver reaching 3 months high, with VIX gaining more than 12% – classic behaviors when markets are preparing for wars ahead.

The question we need to ask is whether this constitute an overreaction on the market’s part. Syria’s situation has been mostly the same in the past few years. The latest furore was due to alleged chemical attacks by the Syrian Government on rebels, resulting in deaths amounting to hundreds. This prompted Senator Kerry to proclaim that the Obama administration would hold Assad’s Government accountable for a “moral obscenity”. However, it should be noted that this is not the first time chemical attacks have been allegedly carried out. We do not even need to look back too long; There has been 2 instances on April 25 and March 19 in 2013 alone, while the first alleged chemical weapons attack was reported by UK and France back on 23rd Dec 2012. Hence it is interesting to see news media trying to paint this incident as though that it will be the straw that break’s USA’s tolerance. Apparently America has let the “moral obscenity” slide for the past 3 times, so why would this time round be any different?

Furthermore, there hasn’t been any indication by the White House thus far, and it is unlikely that Obama would want to commit American citizens back into the warzone when promises were made during his State Of The Union speech that he would bring soldiers back home from Afghan and Iraq. This is not saying that US will not intervene, just that a long drawn out war is highly unlikely, and even if US enters the fray, it is possible that selective tactical cruise missile strikes will be the weapon of choice, instead of sending land troops onto Syrian shores. Hence, traders/speculators who are pricing in a long war may be getting ahead of themselves. This is not saying that a long instability is not impossible, but rather we need to see more evidences and confirmation before we join in this panic buying of treasuries.

Daily Chart

From a technical perspective, 10Y prices are hitting key resistances. We are currently trading at the intersection of the descending Channel Top and 126.0 round number support turned resistance. Stochastic readings are pointing higher, but we’ve seen troughs and peaks occurring at this level previously (see April and June respectively). Hence it will not be surprising to see Stoch curve peaking here and move lower, paving the way for a move back towards Channel Bottom. A break of 126.0 will open up 128.0 as 1st level Bullish target, and if Fed does not announce any tapering cut during September FOMC, we could see prices rallying up further if 128.0 remains unbroken.

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