The DeCarley Perspective Trading Newsletter

T-Bond and T-Note Futures seeing temporary buying

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This commodity trading newsletter was distributed to DeCarley brokerage clients on January 20th, 2016.

Treasuries futures are in favor at the moment, but is it an overreaction?

 

It has been a treacherous year for fixed income investments. Turmoil in the junk bond market, as well as European corporate bonds, has suddenly allowed the safety of U.S. Treasuries to shine. According to the Wall Street Journal’s measures, European corporate bonds are trading at levels conducive of a recession. Further, many junk bond funds and individual securities are trading at levels one would have expected in 2008 and 2009, but in today’s environment they probably aren’t justified. Accordingly, it is our view that discounted pricing in many of the distressed fixed-income securities has more to do with liquidity issues in combination of panicked selling, than true fundamentals.

If this assumption is true, the recent inflow of investment dollars into T-bonds and notes should be short lived. Should equities and oil find a way to stabilize, the rotation of fixed income investment dollars from safety to yield will occur rather quickly. Of course, identifying when and where is always difficult.


Although we are a futures and options brokerage, we like to look at the chart of the TLT four our longer-term analysis of the Treasury market. This is because the quarterly expiration of Treasury futures contracts tends to skew the charts relative to the non-expiring TLT.

 

 

Click thumbnail to expand TLT ETF chart

A weekly TLT chart portrays a market facing swift headwind resistance in the form of a wedge pattern. If the S&P holds the 1800 area, Treasuries should continue to hold prices within the wedge, at roughly 127.00/128.00. A break above this level starts to complicate the bearish case, opening the door for a possible move into the 130s. We see resistance at 129.00, 133.00 and then again near 138.30. Our best guess suggests the market holds at, or below, 129 but traders should be prepared for a momentary panic spike.

 

Click thumbnail to expand Treasury seasonal pattern chart

Treasuries generally trade lower in the month of January, which makes the current rally somewhat out of character. Accordingly, the upside in bonds and notes, although swift, might be temporary.


Seasonality is already factored into current prices, any references to such does not indicate future market action.

**There is substantial risk of loss in trading futures and options.**

These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.

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