RJO FuturesCast

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Interest Rates

Tax Reform Hits Treasuries!

Posted 10/20/2017 10:18AM CT | Tarik Husseini

Treasury bond prices collapsed, and yields rose, late yesterday and into this morning as the Senate passed a budget bill that makes it easier to pass tax reform with a simple majority of votes. 

News hit bond prices from several different angles as risk appetite surged, rotating money out of bonds, which are typically viewed as a safe haven asset. This is best illustrated with today’s market action; S&P at all-time highs 2570, up .35% on the day, and 30-yr Treasury Bonds at 152’02, down .95% on the day.

The other major angle is of course the Fed. According to the CME website, chances of a December rate hike now stand at 91.7%. The Fed has intimated several times that they want to get ahead of inflation, and are comfortable with another rate hike this year. However, the Fed has also maintained that they are not keen to raise rates too quickly, and will take a go it slow approach. This has approach has been welcomed by the equity markets, which don’t like to see aggressively tight monetary policy. The markets also seem to be giving a nod of approval to reports that President Trump is leaning towards Fed Gov. Jerome Powell as the next Federal Reserve chief. Powell is seen as an intellectual ally of current chief Yellen, and likely to maintain her dovish posture.

The technical picture is a continuation of the theme I have mapped out in the last several articles, which can be found under my profile. This theme is the development of what could be the beginning of a bear market in bonds. At the moment it hasn’t fully materialized, but the intermediate trend is down. In the last article I mentioned 154-155 handle as resistance, and an area of opportunity to establish short exposure. That resistance level held into yesterday, and any short term bulls capitulated overnight. There are short and long term opportunities to trade bond futures. Opportunities that are very attractive to traders that would like to explore a different space from the equities markets. 

 

Dec ’17 30-yr T-Bond Daily Chart

Dec '17 30-yr T-Bond Daily Chart

Tarik Husseini