Tuesday, August 12, 2014
U.S. Short-Rate Bears Remain Hardened to Pain
We have examined the bullish advance of the last weeks and Friday’s potential bearish reverse and have expressed reservations about putting too great an emphasis on Friday’s price action as reflective of a bearish top. We recognize the struggle the bullish advance had despite numerous geopolitical events and global economic data which were supportive of even lower yields.
A look to the open interest changes as a result of trade on Friday indicates that positions (Eurodollar Futures) were accumulated in that session by nearly 95,000. Instead of fleeing in the face of rising Eurodollar prices, new selling took place which can be the fuel for eventual short covering. Clearly there would have been some bearish-minded who felt going home on Friday with a smart short position, their lot would be more appealing at this stage than it actually is presently.
Friday was volatile and we should expect greater volatility in fixed income as well as other asset classes until such time as Federal Reserve policy intent is more easily read. Generally speaking we tend to favor rejections like Friday saw as indication of advance warning of major moves and reversing price action. However, it had not been a straight line higher in Eurodollar or Treasury prices over the last months and so the overbought conditions are indeed relatively mild.
For my guide, I would remain watchful of price action, but anticipate still lower yields forthcoming. Despite a great interest otherwise, there are enough similarities with the last 4-5 years that I am inclined to believe a new cyclical yield low (TY) can be achieved sometime over the next 2-3 months.
Enclosed is a chart of EDH6 (Red March ’16). Last Wednesday bested a downward sloping trend line dating from late-May. The next session marked the best settle price since early-July. A bearish Harami and bearish shooting star are seen Thursday/Friday. The confirmation of these bearish developments in subsequent candlestick price action has been lacking. Open interest changes are also not supportive of a sentiment shift. Finally, a new record net short position (Eurodollar Futures and Options combined) was registered by ‘non-commercial’ (large spec.) for the week ending Tuesday, Aug. 5. This is clearly not a sign that the bearish contingency is abandoning their short position...Yet.