Interest Rate Increase Ahead for 30-Year Bonds

We all know the Fed has short-term rates pinned to the floor. So I’m not saying we’ll see rates surge higher anytime soon. And I don’t expect the FOMC will raise rates at its meeting next week.

But even a minor adjustment higher in rates should make prices retreat enough for a trade. I think we could see 30-yr bond prices fall back near 144’00 in the coming weeks. June futures are breaking their 9-day MA (light blue line) as I write and stochastics are starting to roll over.

US Treasury Bonds chart, April 25, 2013

US Treasury Bonds chart, April 25, 2013

A toppy 30-yr Treasury echoes the “risk on” theme I wrote on yesterday. Capital flows go into risk assets – commodities and equities – and out of the perceived safe haven of Treasuries when the market is confident. It appears this is where we are now.
There are several ways to construct a bearish Treasury trade. I would be willing to have bearish exposure in both the long and short ends of the curve.

Trade Ideas:

  1. Short June 30-yr bond futures and sell out-of-the-money puts 1:1.
  2. Short one (1) 30-yr bond and buy one (1) 10-yr note futures; NOB spread.
  3. Back Ratio Spread – Sell one (1) June 30-yr bond 147’00 put and buy four (4) June 30-yr bond 145’00 puts. The cost of this spread should be between $775 and $800. The idea is catch a 2-point move and liquidate sometime in the next two weeks. Do not hold until expiration unless prices collapse.
  4. Sell short long-dated Eurodollar futures (2015 and 2016 contracts).

As always, I’m here to discuss specifics and give guidance. Give me a call…
To discuss in more detail this chart or any other you can reach me at: mbradbard@rcmam.com or 954-929-9997

Risk Disclaimer: The opinions contained herein are for general information only and are not intended to provide specific investment advice or recommendations and are not tailored to any specific’s investor’s needs or investment goals. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results.
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