Monday, August 29, 2016

Rise in Treasury Short Squeeze Risk In Front of Employment Report

The long end of the Treasury yield curve has repaired dramatically from Friday’s poor performance.  The front end of the curve too may do enough by today’s close to discount the bearish implications of the most recent weak price action. 

On Friday, TYU6 (Ten Yr. Treasury future) had the largest open to close decline since August 5th.  The settlement was at the session low and that settlement was lower than any since before the UK ‘leave’ vote.  The lack of follow through should be disquieting for the bearish-minded trader.  The recovery today, if prices hold until settlement, discounts the bearish implications of Friday’s decline.  It does not eliminate earlier bearish warnings, but indicates that bullish minded investors remain unimpressed with heightened concerns about a Fed rate response at the September or December meeting. 

Currently, we should expect resistance toward 132-07, 132-18 and 133-01.  Support is at 131-12 and 130-26.

EDZ6 (December Eurodollar future), which incorporates expectations for Fed policy through the first quarter of 2017 had found an interim high in mid-August at 99.165 with a retest of the 100 day moving average.  Creating a bearish shooting star on that session, the contract has declined rather steadily from 99.165 to a low today of 99.02.  On Friday, the contract settled as low or lower than at any time since mid-March. 

At the time of this writing, today’s recovery is right at the ‘mid’ from Friday’s session (99.05).  A settle above this mark would indicate a discount of the bearish implications of Friday’s decline.  There has been some (150K) reduction in aggregate open interest since mid-August when the contract started its latest descent, but that position paring is not so great as to indicate an important shift in sentiment. 

With the employment report released at the end of the week and bearish minded traders already having been rewarded for their view, there appears to be some heightened risk for a bullish short covering squeeze.  A first step toward this happening (EDZ6) is a settle above 99.05 today.     

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