Bonds and notes rallied moderately sharply in the face of higher equities and lower safe havens (greenback and gold). There seems to be a transformation in market psychology and more importantly psychology. In the coming days we will know if the timid trade in Treasuries or the risk on trade was the right call.
In the short-run, we have to lean toward some sort of intermediate term top in bonds and notes. The economic recovery is more like Swiss cheese than a building block for the future but that isn’t a surprise. The markets have been operating with this knowledge for months (even years) so it doesn’t make sense to assume we’ll see a sudden influx of fixed income buying at pathetically low rates of interest without some sort of shoe dropping in Europe.
In economic news, the second estimate of GDP was a little weaker than most were expecting at a growth rate of 1.8% but again…nothing shocking here. Similarly, initial claims for weekly jobless claims moved up to 424,000.
The Treasury issued $29 Billion in 7-year notes to an eager group of buyers. The yield came in at 2.429% and the bid to cover a healthy 3.24. The news enabled bonds and notes to turn positive and that seemed to trigger rather swift short covering.
COT data in recent weeks suggests large speculators (smart money?) are adding to short positions in the 10-year note and small speculators are gradually covering their shorts. They might be running out of margin, money or both but it is the small spec category that tends to be getting out when it should be getting in and vice versa.
We’ve been calling for this move to see the mid 126’s in the June 30-year bond future and near (or maybe a little above) 124 in the June 10-year note. At the time of this writing, prices were getting near our targets…accordingly, we will be monitoring trade tomorrow and looking for a possible bearish opportunity.
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
Treasury Bond and Note Option and Futures Trading Recommendations
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