Friday, July 1, 2016

Ten Year Treasury; Bull Flag and 1.1% Yield or Bearish Shooting Star

Large month-end asset reallocation was likely a strong contributor to the severe swings in equity and fixed income price action over the last 24 hours.  Late yesterday strong selling pressure came to fixed income product as equity prices rose to new post-UK vote highs, which might have been interpreted too early as an ‘all clear’ signal to some traders.

Instead, some sources argue that it was predominately the month-end movement and asset rebalancing from fixed income to equities for many managers that caused that sharp adjustments.  Stronger price action in Treasuries overnight could be attributed to buyers taking advantage of what might have been considered by them a bargain based on that rebalancing. 

Some of those Treasury gains are fading in the early U.S. trade, offering implications for the technical backdrop going into the long U.S. holiday weekend.  Specifically, a bull flag can be drawn that may have been elected with trade today.  Conversely, a failure from the session highs to settle toward the session low might create a bearish formation near recent highs.    

At current the current level of 133-12, the bull flag will have been elected.  I am more comfortable with formations that are marked on settlement pricing, so would want to see a settle here or higher for close.  A settle any much lower from here would form a bearish shooting star, which would correspond with an overnight test of post-UK vote high. 

I remain skeptical about the immediate bullish prospects for usfi as I suspect there was some misinterpretation about the immediate implications of the UK vote.  Heightened concern for the uncertainty aspect of global economic developments, a situation that has always been with us, is being offered too much attention.  It is not as likely to temper business investment, consumer spending and more generally global growth as some fear. 

If a bull flag has formed, its objective would be 136-11, roughly in line with a yield of 1.1% from 1.43% currently.  Conversely, a ‘bearish shooting star’ today would suggest a failed test of the post-UK vote high and potentially higher yields.  Bottom line; stay tuned and try not to overreact to wider swings.   

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