Tuesday, July 21, 2015

Treasury Long End Under Pressure

There was a scramble last week to liquidate shorts in Bonds as market participants looked for clues as to the reason for the flattening of the Treasury curve taking place.  Some pointed to the still unsettled Greece debt developments (since less unsettled) that might have prompted a haven bid. Others noted weaker oil prices with Iran coming on-line as a ‘global-producer’ creating deflationary fears once again.  Finally, a number suggested that the recent heightened concerns for illiquidity induced rate spikes had abated resulting in a removal of shorts in Treasuries out the curve. 


The Treasury 5’s-30 yield curve flattened by 15 basis points over the last week from 154 to 139 before recovering to 141.5 this morning.  This rather large flattening over a week’s time happened also in late May before repairing to the recent wide of 156.  After the sharp flattening, there appears room for some consolidation as Treasury sellers look out the curve for hedging needs. 


The Treasury Bond future is a prime candidate for a short-term bearish position.  The contract advanced regularly over the last week and made a 4th consecutive new high yesterday.  The gain into the early part of the session could not be held and the contract formed a bearish ‘spinning top’.  Additionally, the two session period to include yesterday and Friday, forms a bearish ‘harami’ and tells of a bearish reverse.  Today, prices opened higher and are failing, with current prices moving through yesterday’s lows. 


There are no economic releases today and the calendar shows no Fed speakers scheduled.  As such, there is little ‘important’ scheduled news to have sway on markets and we should expect that the forces in play prior to today should carry forward.  Those forces appear to be a recapturing of short positions in the long end of the Treasury curve and additional pricing of greater odds for the Fed to begin normalizing policy rates this year. 


We see a good chance for USU5 to trade below 150-00 (possibly to 148-00) by week’s end from 151-11 last.  


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