Treasuries Rally on Mixed NFP Report and G-20 Summit Concerns

Monday, November 7, 2011

After a quick rally of nearly 8 full points during the past few sessions, Bond futures were in need of a correction, and that appears to be what has happened during the past two trading sessions. Some longer-term traders who remain bullish on Treasuries may wish to use the recent price correction to explore selling out-of-the-money puts in Treasury bond futures options with strike prices below near-term support near the 137-16 level. For example, with the March Bond futures trading at 140-12 as of this writing, the January 133 puts could be sold for 56/64ths, or $875, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in late December should the March Bond futures be trading above 133-00.

Fundamentals

A slightly worse than expected employment gain for October combined with a lack of a significant plan to deal with the European debt situation from the G-20 summit has traders once again moving to a "risk off" mentality, which is supporting US Treasury prices. Early this morning, the Labor Department announced that US non-farm payrolls increased by 80,000 jobs in October, which is below the 100,000 jobs most analysts were expecting. Jobs in the healthcare industry were among the biggest gainers, adding 12,000 jobs last month. Manufacturing jobs remained steady, and the construction industry reported a loss of 20,000 jobs last month. The public sector continues to see job losses due to tightened budgets on the state and local levels. Not all the news was gloomy, however, as the Labor Department revised upward September payrolls by 55,000 jobs, and the unemployment rate fell by 0.1% to 9.0%. The headline NFP figure combined with a fairly dour economic outlook by Fed Chairman Ben Bernanke on Wednesday gave traders one more reason to bid for US Treasuries. On top of the NFP report, European leaders had little progress to show regarding a plan to deal with the European debt situation from the meeting of G-20 nations that wrapped up on Friday. No non-Euro zone country offered any help to fund the EFSF bail-out fund and there was only talk of exploring an increased role for the International Monetary Fund (IMF) in adding the European situation. So until we see something concrete out of Europe and the employment picture in the US shows meaningful signs of improvement, it appears that Treasuries will continue to see inflows from investors, despite near-record low interest rates.

Technical Notes

Looking at the daily continuation chart for Treasury bond futures, we notice the market holding near the upper end of what may end up being a bull flag formation. Prices are above both the 20 and 200-day moving averages, and momentum as measured by the 14-day RSI has been stuck in neutral, with a current reading of 53.11. Major resistance is seen at the October 28th low of 135-05, with resistance found at this past Thursday's high of 143-04.

Mike Zarembski, Senior Commodity Analyst