Tuesday, December 2, 2014

Last-Best Test of 'Cyclical Yield Low'

The timing might not have been worse for those who have ‘come to the fold’ of bullish participants in the last week.  The JPM Treasury Client Survey forwarded today indicates that the number of ‘net longs’ in both the ‘Active’ and ‘All’ categories has reached an extreme.  The ‘All’ client category ‘net long’ is the highest since April while that ‘Active’ client category shows the largest number of longs since October of 2011. 

On Wednesday, we looked at some signs that there might be a further stretch in the bullish Eurodollar/ Treasury advance before finishing its mid-October retracement.  That stretch appears to have ended yesterday with a dramatic plunge in commodities attracting stragglers into the bullish fixed income camp. 

With what will turn out to be rather consistent rhetoric from Fed officials about the likelihood for a mid-2015 adjustment in policy rates, concerns for global deflationary impact on the Fed’s policy rate decision will subside and greater emphasis will be placed on the strengthening domestic economic conditions in the States. 

The Green December (2016) Eurodollar reached as high as 98.40 on Monday, just shy of the October 15, multi-year high settlement of 98.45.  Importantly, the contract settled back below the next highest settle of Oct 21 (98.38).  Along with similar rejections throughout the curve and a steepening of the Eurodollar yield curve, I strongly suspect that yesterday’s advance may have been the last meaningful attempt against the mid-Oct yield lows (also the ‘cyclical yield low’) for the balance of the year (at least).  

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