Wednesday, February 12, 2014

10 Year Treasury Passes Cyclical Yield Test

In our last look at U.S ten year Treasury note futures (TYH4) on January 29th (see below), we reviewed the ‘cyclical yield analysis’ that has provided strong entry opportunity for positioning over the last years.  Specifically, as U.S. ten year Treasury yields reached back toward the October 23 low of 2.502%, we were/are advised to position on expectation that the ‘cyclical’ yield low level will hold (until at least Mar 31, 2014).  A table was offered that indicated where TYH4 calls and puts, per half strike, were available then and rough prices on expected premiums on lower yield marks. 

An opportunity was presented on the approach of the payroll report and again shortly thereafter when ten year yields reached below 2.58%.  TYH4 now at 125-08 is just below the prevailing level when we updated our cyclical yield analysis on January 29th, having traded on February 3rd, 4th and 5th to highs at of 126-15 / -16.   Clearly there was an opportunity to position long some out-of-the-money (otm) puts or short some slight in-the-money (itm) puts.  There is only 9 days remaining for the TYH4 options now, but technical conditions seem to support still lower Ten year treasury prices.  Additionally, the Treasury is auctioning $24B of 10yr securities today as part of its three part series this week of 3’s, 10’s and 30’a.   

As indicated earlier, TYH4 prices topped out at 126-15 to -16 on the first three sessions of February.  Those highs correspond to a failure level back in late October with the high settlement reaching to 126-15+.  

More recently, TYH4 formed a bearish ‘dark cloud cover’ on Feb 2-3 and confirmed the bearish implications of that pattern with the shooting star on Feb 5.  Friday’s post employment report disappointment advance left prices well off the session high and Monday’s price action did little to confirm any bullish implications to the advance.  Instead, Monday was a pause that on Tuesday found reverse and a settlement below Friday’s opening level.  A lower settle today will open the door to still lower levels and build a platform for momentum sellers to join in. 

Those short TYH4 calls or long TYH4 puts, having positioned on the approach of the ‘cyclical yield low’ should consider holding these positions as long as TYH4 settles today below 125-14.   A settle below 125-14 level today leaves good prospect for a trade to 124-06 prior to TYH4 expiry in 9 days. 

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