Monday, July 18, 2016

Where to be Long and Short U.S. Fixed Income

This is to be a, ahem, quiet week for fixed income.  Economic data is largely confined to housing with ‘Philly Fed’ and ‘Leaders’ reports in addition on Thur and Fri respectively.  Housing has been on a more tempered pace and statistics therein are less likely to alter the direction of monetary policy this week.  Philly Fed having risen last month off a 4 month low will attract some attention as will ‘initial’ jobless claims which were surprising low (254K) last week.  Leading economic indicators (‘leaders’) which last month dove to negative (-0.2%) for the first time since January will be watched also. 

Longer dated Treasury prices fell last week after having, over the prior two weeks, either well exceeded (Bonds and Ultra) Brexit highs or lingered there around (TYU, FVU and TUU).  Further up the curve in Eurodollars, the nearest to expiry contract (EDU6) made steady progress lower following the June 24th high. 

What is striking is the steady nature of the decline in the front end of the curve in comparison to the resent ‘reset’ out the curve.  The Sep 2016 Eurodollar (EDU6) implied yield rose 16.5 bps from the June 24th (99.41), 0.59% to Friday’s low future price trade of 99.245 which implied 0.755%.  There were 11 new session lows within a 14 session period starting June 27.  The last of these new low was Friday. 

The Sep ’16 Ten year Treasury future (TYU6) made a new post Brexit high by half a tic on July 6th.  Since then, TYU6 made 6 new session lows, including today’s.  Over that period, the 10 yr cash yield rose from 27 bps. from 1.32 (7/6) to 1.59 (7/15 - Fri). 

Although the generic 10 year Treasury yield jumped over 10 bps more than EDU6 implied 3 month dollar libor, it is TYU6 rather than EDU6 that appears to have more room to run toward higher yields.  EDU6 is stretched (11 new lows) and slightly oversold with a 14-day RSI at 47.  The TYU6 has a similar RSI with only 6 new lows. 

Additionally, in showing obvious trend characteristics, EDU6 is thus required to confirm that status, lest it prove lost momentum and prompt bearish participants to cover and drive prices higher.  TYU6 is not so encumbered.  If the decline since July 6th were to be called a trend, it would be so young, that we would not require it to take on the heavy burden of regularly proving itself at this stage. 

Even so, TYU6, enjoyed an intra-session advance today which drove the contract briefly above the ‘mid’ from Friday (132-03+) before again falling below.  This happened last week (7/13) also and we pointed out then (‘Treasuries Fighting Wrong Battle?’) the necessity for TYU6 make and hold ground above the ‘mid’ from 7/12 if further price gains were to be expected.  The advance last Wednesday did not hold and today’s intra-session advance too does not appear to have been sustainable. 

EDU6 however has reached a psychological signpost at 99.25 and strikingly strong economic data will likely be required to move the contract meaningfully below this level.  There is simply a lack of such requisite data over the next few days and therefore it appears more likely the string of new lows will be broken before the Philly Fed and jobless claims data are reported on Thursday.      

Both EDU6 and TYU6 appear to be confined within smart downward sloping trend channels.  While both contracts could show potential for reversing if ‘bullish Harami’ are formed, a cautious trader might wait for confirmation before becoming too confident about higher prices forthcoming.  A bullish Harami would show in TYU with a settle between 131-28+ and 132-10+.  EDU6 would need to settle between 99.255 and 99.27 for that pattern to form.  


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