06-08-2009: September Treasury Bonds: Interest Rates Stalled Before Fed Raises Them
We can't say it enough times. "Bonds hate good news." And there is plenty of bad news around to keep bonds stronger than most suspected they would remain. As inflation pressures mount, the Fed seems "out of bullets" and ready to raise interest rates again to keep any hope of a strong Dollar against the Europeans. The European Central Bank, more responsible than our Federal Reserve when it comes to fighting inflation, is about to raise. Bond prices generally go opposite to interest rates. So the old hangup remains, inflation versus a deteriorating economy, which is more important? The verdict each day seems to be coming down more and more on the side of a deteriorating economy. Things may get much worse than most suspect. That, at least, is what the stock market is telling us lately.
The old 'flight to quality" is on again as investors rush to get out of equities and into bonds. Just when you thought bonds had had their last gasp, and rising interest rates would put them out of business, they show signs of strengthening once again on extremely bad oil price news.
Most speculators agree that it is a "no brainer" that bonds have entered a long period of a down cycle. The trouble with "no brainer" situations is that when EVERYBODY is on one side of the fence, commodities usually surprise and do the opposite. The hawks on the Fed do a lot of jawboning, but when they act, the bottom will probably drop out of what is left of the economy.
December Palladium:
September Treasury Bonds:
Much of turmoil in financial markets is due to recent record high oil prices. Russian President Dmitry Medvedev blamed the recent global crisis due to high oil prices as part of "economic egoism" where some countries want to get everything without sharing with their neighbors. He said the U.S. financial system was unable to replace global financial markets. China's National Development and Reform Commission Chairman Zhang said in Japan that high oil prices risk sparking political instability in some countries and have already hurt the world economy. $140/barrel oil was detrimental to both developed and developing countries, being driven in part by hedge funds and hot money flowing into the commodities trade. According to Zhang, the oil market was being used as a "tool for finance." Five large energy-consuming countries, U.S., Japan, China, India, and South Korea jointly said to the world at the conference in Japan, calling for oil producers to raise investment, citing the heavy burden already weighing on resource-hungry developing nations. Russia's Deputy Prime Minister Kudrin hit out an international institutuions, saying they must be reformed after having inadequately addressed global needs. "The World Bank should be more of a development and less of a lending institution," he said. Because the IMF wasn't flexible enough, Russia has its own stabilization fund to save itself. The U.S. claimed fuel subsidies in Asia and elsewhere should be blamed for boosting global oil demand. However, all seemed to agree that a "phased withdrawal" of subsidies was desirable. China, the second largest importer of energy has raised gasoline and diesel prices only once this year. This was despite crude oil futures doubling and state firms hemorrhaging money on their refining businesses. Iraq's OPEC Chief stated that an output hike won't ease the record oil price. Analysts began to suspect recent stock market gains when oil exploded nearly $20/barrel in a recent two-day rally. At first retail sales were anticipated to be positive and jobless claims less, but just the opposite happened. As more banks and financial institutions are being forced to absorb more commercial and residential loan write downs, Fed Board members increasingly disclosed that Fed behavior was "risky" while facing these threats to the U.S. economy. Expectations for the economy began to diverge from reality, and as bonds hate good news, one might not underestimate the speed to which bonds and notes will respond upward after falling to last month's lows. As the unemployment rate and oil surged to new highs, investors resumed a flight to quality. Investors were frenetically yanking money out of stocks and into the relative safety of government debt. Unemployment showed the biggest monthly gain since February, 1986. It caught everybody by surprise. It added to fears that the economy will remain slow over the second half of the year. The 30-year bond wound up yielding 4.63%, down from 4.74% Thursday. The 10-year note yielded 3.93%, and the 2-year yielded 2.39%, up from 2.50%. The European Central Bank indicated it might raise interest rates soon, while the U.S. Labor Dept. said applications for jobless benefits dropped last week. One side (Bernanke) seems to be talking up lower rates and a weaker Dollar while the other (Europe) seems to be talking up higher rates and the threat of inflation. House prices in the U.K. are sliding faster than in the 1990's recession. House prices there have dropped 6.5% in the past three months. U.S. home foreclosures set a record rate of 3.24% while the delinquency rate rose to 6.78% on adjustable rate mortgages. Congress seems stalled on a foreclosure prevention program while they figure out how to pay for it.
128.0I R 6/ 6
I IMM - Sep-08 Treasury Bonds, 1/32 pts 100K$ Cm.=0.03 Lim.= 0.9
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Our computer says a non-conventional reactive interpretation of point-and-figure chart signals works best for T-Bonds. Therefore, the above signal is taken as a buy signal.
We are headed toward a cyclical high and can detect no reliable seasonal trend.
Our best-performing internal program is " %R ." It is giving a buy signal.
Results of "DCV" for Palladium (blue lines = successful trades, red, unsuccessful): (Always in the market.)
Our third system has just triggered a buy signal. (Note, disregard the year date on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)
The point value is $1,000. Initial margin on a single contract is $2,700. Use of options is advised.
Scale trade sellers are entering the market in this price range for the long term.
In the chart below, the yellow line is the futures price, read on the right axis. All other colors are read on the left axis. Red is small speculators. Green is large speculators. Blue is commercials. Large speculators with the best track record are getting increasingly-short.
The average volatility shown below suggests that an uptrend remains intact from the last volatility low point.
Our option trade recommendation is to Sell the December Treasury Bond 114 Put @ 7/32 or better.
The exchange-provided "latest quote" looks quite stale on the chart, so be sure to have to broker call the exchange floor for latest bid/ask before making trade.
Here's an intraday chart for the previous day ( 6/06 ).
Risk Versus Opportunity Report
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USU8 September T-Bonds
High Price: 119.07
Current Price: 114.44
Low Price: 112.15
Risk: 0.040
Opportunity: 0.080
(O/R) Ratio = 2.022
Level Table:
| Factors | Weighted Points |
|---|---|
| Parabolic Chart | + 1 |
| Nirvana Chart | + 1 |
| News | + 1 |
| Point & Figure | + 1 |
| Cyclicals | + 1 |
| Seasonals | 0 |
| Internal System 1 | + 1 |
| Internal System 2 | 0 |
| Third System | - 1 |
| Commitment of Traders | - 1 |
| Historic Range | - 1 |
| Range/Volatility | + 1 |
| Level Table | + 1 |
| Other Factors | - 1 |
| Total | + 4 |
Place 5 September Treasury Bond Contracts on a Buy Watch with stoploss @ -(2 - 7/32) below the get-in point.______________________________________________________________________________________________________D.N.Y.
