Bonds Rise as Defensive Play

Today's Idea

It appears that this recent upswing in Bond prices has been driven by short-covering and shorter-term defensive plays, but the prospects of long-term price appreciation do not appear to be great at the moment. Technically, the recent rally has failed to make any impact on the chart. For these reasons, some traders may wish to consider taking on a bearish position, such as a bear put spread. Some traders may wish to buy the January Bond 125 puts and sell the January Bond 123 puts for a debit of 0-28, or $437.50. The trade risks the initial debit for a potential profit of $1,562.50 if the March Bond futures close below 123-00 at expiration.

Fundamentals

Bond futures seem to have found new life after flirting with the mid-125's, as some traders seek the relative safety of US bonds. The Irish financial crisis has stoked fears over the quality of non-US sovereign debt. Also, the artillery fire exchange between the two Koreas has many traders in a more defensive mode, given the rocky relationship between the nations. The equity markets seem to be favoring the bear camp in recent sessions, giving Bonds a boost. With Black Friday and Cyber Monday later this week, many investors are uncertain that retail sales can meet current projections, and these traders have been buying treasuries in order to limit their exposure to equity market gyrations. All of these factors support Bonds over the near-term, but many traders still remain skeptical over the longer-term. The Fed's asset-buying program seems to favor shorter duration treasuries over the Long Bond. Inflation seems to be on the rise, which could pressure the Bond market and cause yields to increase.

Technical Notes

Turning to the chart, we see the Bond continuation chart finding support near the 125-00 level in the near-term. However, prices remain below the major moving averages, indicating the market has not yet shown us that any major strides are being made. The previous major support level at 130-00 could now provide significant resistance for the Bond market. To show upward progress, the market will have to cross through the 128-27 and 130-00 levels. On the downside, a breakout below the 125-00 level could bring back heavy selling pressure.

Rob Kurzatkowski, Senior Commodity Analyst