Is The Treasury Bull Run Up?

When the boat is leaning one way I generally prefer to be on the other side. Do I think the 33-year bull market is over in Treasuries...the simple answer is yes but in the short run I think the debt complex has gotten ahead of itself and we get a rebound from current levels. The month of May was a one-way trade giving back the previous two months of gains. Since then, support has given way breaking support on 6/7 with a settlement under a pivot level (green horizontal line) dragging September futures to 14 month lows. It would appear that bulls are defending the 138’00 level and I think it possible we get a 50% Fibonacci retracement lifting this contract back to 143’11 (middle white jagged line) or thereabouts.

Can't Wait
Expect fireworks next week at the FOMC meeting where Greenspan -- I mean Bernanke -- will clarity if and when the Fed will take its foot off the gas pedal. It's clear to me and it looks like the market is starting to comprehend that QE infinity actual cannot go on indefinitely. Rates’ going higher in 2014 /2015 appears to be getting priced into the market. However the Fed has been clear that there will not be 1/4 point increases 17 consecutive meetings …we’ve seen how that movie ends. Treasuries in my eyes are overextended and we rebound if Bernanke confirms next week talk is cheap and there are no concrete plans...yet.

Which Way China?
Has the leg lower in Treasuries been effected by lower expectation out of China? Slowing in China being bullish or bearish for Treasuries is up for debate. A prospective client yesterday suggested a real estate bubble in China would mean assets flow into Treasuries as a flight to quality but being devil’s advocate what if they need to raise liquidity and as a US debt holder China is forced to sell? HMMMMMM...I don’t think China plays a role immediately as my suggestion is simply a jump in the coming weeks.

So why the NOB spread? The margin is lower than outright longs and we are able to weather the trade if our timing is less than perfect. Being we’ve already started working into the trade it is evident we are early. Every tick in the spread equates to 1/32 or $31.25. The idea is that if Treasuries gain 30-yr bonds outpace 10-yr notes therefore you make more on the 30-yr leg than you lose in 10-yr leg. If wrong and Treasuries move lower as they have in recent sessions you should offset a larger loss in 30-yr bonds with a smaller gain in 10-yr notes. The NOB spread is approaching levels seen in March when the spread bottomed and then widened 5 plus points ($5,000) in just over seven weeks. Past performance is not indicative of future results. Risk to reward I’m fond of the trade as I think we’ve felt most of the pain in the last week and I see 2-3 points or $2-3,000 of profit potential in the coming weeks.

Retracement Watch
As goes 30-yr bonds so goes the trade. A return to the lower Fib level represents a $3,000 advance in bonds and at the same time would likely mean a $1,000-$1,500 move in 10-yr notes. A settlement above the 20-day MA (red line) would likely lead to a probe of the 40-day MA (light blue line). On the way down, 30-yr bonds outpaced 10-yr notes 2:1 and I believe that will be the case on a retracement as well…trade accordingly.