Zenith Trading & Holding Corporation

02-07-2018: March Treasury Bonds: Safe Haven Flights Look Temporary

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors


5     7     9


10     8


Currently, with bonds it's all about inflation and higher interest rates to control inflation. These factors are poisonous to both equities and bonds, although the two sometimes appear to move opposite to each other. A strong equities market draws investors away from bonds. What we are seeing lately is a move toward bonds as a "safe haven." How long that will last is uncertain, but apparently it will not last forever. Bonds seem destined ultimately to go lower, no matter how one looks at it, but it is a matter of timing. Commodities contracts have a time limit, and when bonds will go lower is dependent upon a number of cyclic factors very difficult to predict.

Intermarket Analysis

We fed Treasury Bonds, Treasury Notes, and Eurodollars into a neural network to get the following result:

Parabolic Chart

March Treasury Bonds:

Parabolic Chart

Nirvana Chart

March Treasury Bonds:

Initial Chart

News Analysis

Weakening equities in the last few severe down trading days have been supportive for bonds. Equities weakness has extended globally. Hawkish comments by Fed Presidents Williams and KKaplan at the end of last week stengthened the case for 3 Red rate hikes duiring 2018, which is not supportive for bonds as they move opposite to interest rates. An ongoing selloff in cryptocurrencies and comments by Canadian Prime Minister Trudeau that this nation is willing to "walk away" from the NAFTA Agreement, provide fundamental reasons to suspect an intermeidate bottom in Treasuries. There is safe haven psychology flowing toward bonds even though the market has initially been extended dramatically downward on charts. Some say the slide in equities is "off improving economic expectations and accomanying higher interest rate fears." It is possible that the highest Chinese services producer manufacuring index reading in seven years combined with generally favorable euro zone services PMI readings leaves the U.S. bond markets feeling pressure from an extension of recovery expectations. Markets have seen some evidence of reflation from both the Euro Zone and the U.S. recently. Safe haven issues are not onerous or severe and that could limit short covering in Treasuries. A five day high to low slide in March bonds of nearly 4 points leaves the market short-term tedhnically oversold.

The U.S. will need to offer incentives to attract foreign solar firms to invest after President Trump slapped steep tariffs on solar panels. The U.S. needs to attract foreign solar firms.

Investors' faith underpinning the bull run in markets began to crumble domestically and in Asia. Japanes Nikkei dropped at least 5% and Australian shares dropped 3%. A 1,600 point drop in the Dow Industrials is considered the biggest drop in history (not taking inflation into account). The S&P is down 7.8% from its high on January 26th. The trigger for the selloff was a sharp rise in U.S. bond yields following data that showed U.S. wages increasing at the fastest pace since 2009, raising the alarm about fighting higher inflation with higher interest rates.

The CBOE Volatility Index (off of which some ETF's used programmed trading) jumped 20 points to 30.71, its highest level since August 2015. Risk takers have been the winners. Their leveraged position is now being unwound. European shares also tumbled with the German DAX hitting a 4-month low. If the Fed doesn't raise interest rates, long-dated bonds will be sold off on worries about inflation. The economy will slow down. Rising wages will mean corporate margin profits will be squeezed.

What's driving bond prices is flight to quality whereas interest rate considerations will ultimately not be supportive.

Jerome Powell was sworn in as chairman of the Federal Reserve on Monday. Investors are concerned that he is taking the reins as the economy is overheating. Tighter financial conditions will add to growth concerns, but there are simultaneously concerns that the Fed may increase the number of rate increases this year.

One consideration is that the earnings yield for stocks even after the amazing run-up in the past year and factoring in the latest drop is a relatively high 5.6%. That's still double the interest rate on the 10-year Treasury, suggesting that to sell treasuries competitively they could be under pressure.

The Labor Dept. reported that the U.S. economy added 200,000 jobs in January, beating a Reuters economist's poll of 180,000. Wages also rose 2.9% on an annualized basis, sending mortgage rates upward. The ISM non-manufacturing index hit 59.9 in January, above the 56.5 expected by Reuters economists. So there is continued expansion in the U.S. services sector.

Treasuries have also been hit by expectations that the U.S. deficit will rise due to recent tax cuts, leading to more government borrowing. Economic sentiment has improved worldwide and central banks have started to unwind some of their post-crisis monetary stimulus. There has been some indication that bond and equity prices have been in synch to some degree in an unusual situation, so that what could be bad for stocks could also be bad for bonds in the longer term.

Point & Figure Chart

171.0I                                                                  T  2/ 5
     I IMM - Mar-18 Treasury Bonds, 1/32 pts 100K$ Cm.=0.03  Lim.= 0.6
     I                           X
     I                           XO
     I                           XOX
     I                         X XOXO
     I                         XOXOXOX
     I                       XOXO   OXO
     I                       XOX    OXO
     I                 X     XO     O O
     I                 XO    X        O
     I                 XOXOXOX        O        XO
     I                 XOXOXOX        O        XO
     I                 XO OXOX        O      X XOX
     I                 X  OXO         O      XOXOXO
     I                 X              O    X XO O O
     I     X           X              O    XOX    O
     I     X X     X   X              O    XOX    O
     I     X X     XO  X              OX X XO     O
     I     XOX     XOXOX              OXOXOX      O
     I     XOXO    XOXOX              OXO OX
     I   X XOXO    XOXOX              O   OX
     I   XOXOXO    XOXOX                  O
     I   XOX  OX X XO O
     I   XOX  OX XOX
     I   XO   OX XOX
     I   X    O OXOX
     I XOX      O
     I XOX
     I XO
     I X
     I X
     I X
         111          11              1          1
The above chart is giving a conventional sell signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical low and a seasonal up period.

Cyclicals Cyclicals Seasonals

Internal Program

Our best-performing internal program is "Thrust." It is giving a sell signal.

Internal Printout 1

Results of "Thrust" for T-Bonds (blue lines = successful trades, red, unsuccessful): (Always in the market.)


Third System Confirmation

Our third system has triggered a buy signal. (Note, disregard the year on the chart. Our regular readers know this is not a Y2K-compliant system, but it still works.)

Third System


The point value is $1,000. Initial margin on a single contract is $2,750. Use of options is advised.

Historic Range

Scale traders are not a factor in this price range.

Historical Chart

Commitment of Traders

Commitment 1

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. Blue is small speculators. Red is large speculators. Green is commercials. Large speculators with the best track record are getting increasingly-short.

Commitment 2

Interpretation of a Different Site Below (Their trader categories vary from ours):

Commitment 3

Volatility / Probable Range

FB 1 FB 2

The average volatility shown below suggests that a downtrend remains intact from the last volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Treasury Bond June 145 Call and Sell (1) Treasury Bond June 144 Call @ 8/64 to the sell side or better.

o 1 o 2 o 5

Calendar Spread

What the Mar. - Jun. calendar spread suggests to us is that buying the near contract and selling the far one is at most times not profitable, which we think is a sign that these futures may go down in the long run. The best time to enter or leave the above spread is when it is at +0.60 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at +1.59 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be at the sell the near, buy the far point.

Level Table:

Level Table

The path of least resistance is down.
157.5|                                                                  T  2/ 5
 IMM - Mar-18 Treasury Bonds, 1/32 pts 100K$ Cm.=0.03  Lim.= 0.6
     |AAAABBBBBD[[   <<<
141.0|-A-B-C-D-E-F-G-H-J-K-L-M-N-O-P-Q-R-S-T-U-V-W-X-Y-Z----|----|-- TPO=-0.226
                                         1 1 1 1 1 1                  
       2 2 3 3 4 4 5 5 6 6 6 7 7 8 8 9 9 0 0 1 1 2 2 1 1 2           2
       0 2 0 2 0 1 0 1 0 1 2 1 2 1 2 1 2 0 2 0 2 0 1 0 1 0           0
       7 1 7 1 4 9 3 7 1 5 9 4 8 1 5 1 5 9 3 6 0 5 9 4 9 2           5

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 2/05 ).

Intraday Chart

                 Risk Versus Opportunity Report

                 USH8    March Treasury Bonds

                      High Price:  147.95
                   Current Price:  145.69
                       Low Price:  141.13

                            Risk: -0.031
                     Opportunity: -0.063

                    (O/R) Ratio =  2.018

Overall Recommendation

Decision Weighting Factors
FactorsWeighted Points
Inter-Market Analysis - 1
Parabolic Chart + 1
Nirvana Chart + 1
News - 1
Point & Figure - 1
Cyclicals - 1
Seasonals + 1
Internal System 1 - 1
Internal System 2 0
Third System + 1
Historic Range 0
Commitment of Traders - 1
Range/Volatility - 1
Level Table - 1
Other Factors - 1
Total - 5
Place 5 March Treasury Bond on a Sell Watch with stoploss @ +2.25 above the get-in point when recent price is represented as "146.0625".