Wednesday, July 13, 2016

Treasuries Fighting Wrong Battle?

Treasury prices declined on Tuesday as global risk appetite seemed to have improved.  Declining Treasury price action appeared to have confirmed the bearish implications of the reversing price formation of the Friday through Monday period.  However, Treasury prices are higher this morning, removing a third or more of yesterday’s decline. 

A bearish technical pattern (‘bearish engulfing’) occurred in longer duration Treasury contracts while they made new highs in the period Friday through Monday. The TY, US and WN (10 yr, Bond and Ultra Treasury futures) all developed these bearish formations. Tuesday’s price action was a rather dramatic confirmation of this reversal. Volume in these contracts was above the recent 3 week average, demonstrating some further affirmation of bearish intent.

As price action recovers this morning from the largest two session (open-close) declining price action since August 26th 2015 (a ‘single’ session Nov 3 also beat), we will be watchful for signs of strong bullish interest.  The best way for that interest to be shown is in settlement today above the ‘mid’ from Tuesday.  That level is 121-28.875, 132-27.75, 174-26+, 190-08 in FVU, TYU, USU and WNU respectively).    

RSI reading reached well above 70 for Bonds and Ultra and there were multiple new high sessions without a period of pause. Specifically, the Ultra experienced 9 new session highs without a three session pause, the highest level reached on Monday as it formed the aforementioned bearish engulfing.  The higher number of new highs without pause further indicated ‘stretched’ market conditions.  Without a new high above 193-12 in WNU by tomorrow’s close would indicate a change in bullish momentum.    

Two reasons are commonly cited for the bullish Treasury prices action and the drive toward lower yields over the last weeks.  Haven flows were a strong contributor to the advancing prices in the hours and days following the UK ‘leave’ vote. Prior to the UK vote and no less palpable since, are strong cross-border flows with the primary driver being yield enhancement intentions in a yield starving global environment.  Some of the reasons for latter influence may have been overstated according to Zach Pandl at Goldman Sachs, who in a note yesterday suggested that; ‘once we take into account the cost of currency hedges, the shape of global yield curves, and the higher volatility of US rates, the relative value of US Treasuries is not so obvious.’   

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