Friday, October 21, 2016

UST Front End Leads Weakness

The front end of the yield curve has given some good signals of late, despite the noise from the recent Oct 14th start date for money market fund reform (2a-7).  On Oct 11 and 12, there were two sessions where traders seemed to show indecision.  This indecision was seen at the end of an extensive series of new lows culminating on Oct 12th, 5 month low.  I tend to pay close attention to signs of indecision when a prevailing trend is stretched.  The recovery since had been consistent, if unexciting.  It has left many traders watching rather than participating, preferring possibly to watch debates than practice their profession. 

Advancing price action, only a week old appears to have faltered.  Again, I am talking about the front end of the yield curve here; Wednesday’s price action was again indecisive with TUZ6 (2yr Treasury Note Future) forming a ‘doji’.  That doji or show of indecision came after 5 consecutive session higher highs.  Yesterday saw a higher open (than previous session settle), a failure to make a new session high and a lower close.  All of this points to likelihood that bullish longs had become less enthusiastic about positions.

Skip forward to this morning and prices at the front end of the yield curve are lower still. The Treasury curve continues to flatten under the weight of the front end.  The firm dollar (DXY index) which is making currently making a new high since February may indicate that the market participants there are gearing for a firming of monetary policy.

Unless there is a decisive bullish reverse this morning, then a test of recent lows in the Front end of the curve should be expected next week.  Those lows are marked below and I will offer some charts as well on TUZ and DXY.

Recent Lows Oct 12:
EDZ6 99.025
EDZ7 98.805
TUZ6 108-29+
FVZ6 120-17.75

Have a great weekend.  Thanks for your support this week.  I am very grateful for that.  And although I was raised a good White Sox fan, it’s hard as a Chicagoan not to say ‘Go Cubs’.     

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