Thursday, February 26, 2015

Today's Reverse Should Embolden Bearish Fixed Income Traders

Eurodollars and Treasuries enjoyed a 5 session advance which appears to have ended with early session gains being reversed.  The single session advance on Tuesday was the largest open to close gain since late January.  Today’s reverse removed half or more of those gains in many contracts.  EDM7 has a Tuesday ‘mid’ of 98.0725.  The settlement below this level today discounts the bullish implications of Tuesday’s advance, one that found many bearish participants confused and removing positions.    

Looking back to the January employment report, released on February 6, the ‘mid’ was 98.18.  That very bearish session stood out as having the largest open to close decline for the rolling 5th Eurodollar future (currently EDH6 –‘Red March 2016’) since January of 2011.  Bearish minded traders would have been encouraged by the lack of any substantial advance against that ‘mid’ over the subsequent 3 sessions.  Today’s EDM7 high of 98.17 fell 1 bp shy of that important resistance before turning lower. 

On February 18th EDM7 advanced by 5 bps, a not shabby add given the recent bearish price action.  The next session however, EDM7 reversed more than half of those gains in short order.  All save this past Tuesday has pointed to the bearish nature of trade since even before the January employment report.  The lack of progress in any advance since should be discouraging to the bullish contingency. 

Finally, the reversing price action today underscores the changed nature of trade.  There has been three weeks of trade where any bullish progress only returned contracts toward the lower extremities of the ‘payroll session’ sell-off.  This will solidify that area as important resistance going forward.  As result, we should expect this to embolden the dwindled ranks of bearish contingency.  We shall look with interest to see if open interest rose with new positioning in today’s trade.  Should that be the case, it will add fuel to bearish flames.        

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