Find three charts enclosed in this piece; the NOB spread (long 30-yr bonds/short 10-yr notes), June 30-yr bonds and finally June 10-yr notes. Play your bias with 30-yr bonds as that instrument should move 1.5-3 times the action we see in 10-yr notes. That being said if the trade works as planned traders will make more in the 30-yr bond longs than they lose in the 10-yr note shorts.
The central bank’s bond buying program, part of the Fed’s policies meant to spur the weak US recovery, have so far yielded profits. But both Fed and IMF economists have said as the economy recovers and interest rates on long-term bonds rise, the massive amount of debt accumulated by the Fed could create losses. Big picture that could become a political liability as lawmakers start to pressure the Fed on monetary policy. The potential political headache is likely one of the factors central bank policymakers are weighing as they decide whether to continue their extraordinary monetary policy programs. This piece is not meant to debate if the Fed will taper Treasury buying but rather recognizing an opportunity that after Treasury selling intensified in the month of May we should experience a relief rally that provides a window for a trade.
NOB Spread: 30-Yr Bonds: 10-Yr Notes:Every 1 point move in the NOB spread represents a gain/loss of $1,000. As you can see we are trading at approximately 12.00 on the spread…the widest the spread has been was 10.50 in mid-March which is $1,500 of risk. We were trading at 15.50 in the first week of May, which is a $3,500 move from current trade. Using round figures my objective is a trade back near 14.00 which represents a gain of $2,000 per spread.
If you view this as two individual trades by examining the 30-yr bond chart and 10-yr note chart what conclusions can be drawn? Lower trade was rejected yesterday and it appears we close higher today for the second connective day in both contracts. The stochastics are extremely oversold in 30-yr bonds and on a settlement above the 100 day MA (light blue line) next week we should get confirmation of an interim low. On that expect a grind back near 147’00 in June futures. As for 10-yr notes we are probing the 100 day MA (light blue line) as of this post. I would expect a trade higher with prices approaching the 50 day MA (red line) in the coming weeks. If I am properly reading the tea leaves that should be a $3,500 profit in 30-yr bonds and loss of $2,000 in 10-yr notes for a net profit of $1500 per NOB spread…Good luck and have a Safe Memorial Day!
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