Tuesday, August 18, 2015

It's Not Easy to be a Treasury Short

There is a little something for everyone this morning, likely leaving cautiously enterprising traders a tad perplexed and less inclined to engage.  The front end of the Treasury yield curve is lower while the back end posts higher yields.  This follows recovering price action yesterday that saw the long end outperform and the yield curve flatten.  In fact, Treasury Bond and Ultra Bond futures settled above the high settles of last week’s, China currency devaluation induced, highs of Tuesday/Wednesday, achieving settlements not seen since late April. 

This morning longer maturity Treasuries are lower and shorted dated instruments like two year Treasuries and front Eurodollar futures trade slightly higher from yesterday’s close.  Overnight volume was light and attention was paid to the 6% decline in the Shanghai index. 

We remain impressed by the Treasury reverse seen last week when following the China devaluation of the Yuan, Treasury and Eurodollar futures rallied sharply, only to fail and reverse on Wednesday.  Price action on Thursday and Friday seemed to confirm the bearish implications of that reverse, but yesterday’s trade was anything but cooperative to the bearish contingency.  As such, shorts initiated on the back of the aforementioned reverse are more likely to abandon positions against any additional market strength.  Unattractive price action in other asset classes may spur bullish Treasury minded buyers.   

For guide, I expect that weaker commodity prices continue weigh heavily on the temperament of bearish inclined Treasury traders.  Oil, we pointed out yesterday has a ‘stretched’ or oversold trend condition.  The CRB index is of course at 13 year lows.  Rightly or wrongly however, there seems to be few left who are not already in the ‘bearish on commodities camp’.  Should there be a surprise, it could come from less bearish commodity prices.  

Finally, unless yesterday’s bullish price action is confirmed with still higher trading and settlement levels today, I have a strong sense that the bearish trend will re-engage and will leave many would-be shorts watching rather than participating.     

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