Strong Footing for Treasuries

July 11, 2018 2:24PM CDT

Treasuries have been on strong footing since mid-May as trade war talk has added uncertainty to the markets, and the ability of the Fed to raise rates aggressively in such an environment is being questioned.  The yield on the 10yr note has spiked from a peak of 3.11 percent in mid-May to 2.86 percent this week. 

According to the CME group the scale has tipped in the options market decidedly to the bullish side.  The CME data shows that the purchase of calls has outweighed put buying by 2.4 million contracts.  Additionally, the CFTC has recorded asset managers increasing bullish bets on Treasury futures by 103,000 contracts to 926,000 for the week ending July 3.  The conclusion to be drawn here is the smart money is either buying insurance in anticipation of a stock market rout, or they believe growth and inflation will be more tepid than expected.  Either way, they aren’t necessarily concerned with what the Fed is up to, as rate hikes primarily affect the short end of the curve. 

Technically, 30yr bonds are still hemmed within a range since Feb, between the 140 handle and the 146 level.  Currently the Sep 30yr is trading 145’10, with a recent high of 146’11 on July 6.  I think it makes sense to continue trading the range until it is broken.  30yrs are near the high of the range.  With CPI coming out tomorrow it makes sense to get short exposure on a spike above 146.  Expectations are for a rise of .2 aggregate, with the core CPI at 2.3 per cent.  Of course, inflation will have to be lower than expected to get up there. Keep in mind this would be counter to the smart money, as noted above, but it makes sense in terms of price action. 

30-Year T-Bond Daily Chart

T-Bond Daily Chart

RJO Futures | 222 South Riverside Plaza, Suite 1200 | Chicago, Illinois 60606 | United States
800.441.1616 | 312.373.5478

The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that RJO Futures believes to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgement at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

This material has been prepared by a sales or trading employee or agent of RJO Futures and is, or is in the nature of, a solicitation. This material is not a research report prepared by RJO Futures Research Department. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

Distribution in some jurisdictions may be prohibited or restricted by law. Persons in possession of this communication indirectly should inform themselves about and observe any such prohibition or restrictions. To the extent that you have received this communication indirectly and solicitations are prohibited in your jurisdiction with registration, the market commentary in this communication should not be considered a solicitation.