RJO FuturesCast

Daily Futures Market News, Commentary, & Insight

Treasury yields have hit their lowest levels since November of last year as mounting tensions with North Korea, and dovish statements by Fed members, drive futures higher. The 10-Year yield is currently hovering just below 2.07, with the 30-Year in the neighborhood of 2.68.

On Sunday, North Korea conducted its sixth and most powerful nuclear test to date, and it is reported that they are readying for another ICBM test in the coming days. The bomb test was followed by a statement on Monday by the White House that “all options to address the North Korean threat are on the table.”

On the Fed front, yesterday Fed Governor Lael Brainard said the US central bank should go so far as to make it clear it is comfortable pushing prices modestly above the Fed’s 2 percent target. “We should be cautious about tightening policy further until we are confident inflation is on track to achieve our target,” Brainard, a permanent voter on monetary policy, said in a speech in New York. Later in the day, Minneapolis Fed President Neel Kashkari added that the Fed rate hikes may be slowing inflation, wage growth, and job growth. “There may be a lot more slack in the labor market than we appreciate,” Kashkari said. This comes on the heels of a weaker than expected jobs number last Friday, which showed the US economy had added 156,000 jobs in August.

The next FOMC meeting begins on Sep 20, with the Fed Funds rate expected to remain unchanged at 1.25%.  Although the Fed has hinted that it wants to raise rates one more time this year, the odds on that happening by December have dropped to 31%.

Technically, 30-Year futures look a bit stretched to the upside. Currently, the front month Sep futures is north of 15800, and there is some room up to the 160 handle in the current channel, but that hinges on North Korean tensions ratcheting even higher and Economic reports showing weakening growth as well as tepid inflation. At this point, there are substantial bullish undercurrents priced into the market. We would look to cautiously begin adding short exposure as it is likely tensions with NK will lessen, and the Fed will begin to pair back their balance sheet as announced. Keep in mind that this is a counter trend trade, and thus best initiated with risk minimizing strategies. This can be done by buying the NOB spread, or utilizing options to minimize risk.

30yr T-Bond Daily Chart

30yr T-Bond Daily Chart

Tarik Husseini