10-10-2018: December Treasury Bonds: Rate Shocks

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Point & Figure

Internal Progrm
Third System

Historic Range

Random Chart
Calendar Spread

Level Table
Other Factors

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5 Bond futures have fooled investors for many months, even recent years. It seems a no brainer that interest rates will continue to go up in a long tightening cycle, and therefore bond prices will go down. So why haven't they done so until now? Always one must be aware that futures contracts have a limited life span, so while bonds will ultimately surely go down, exactly when that will happen may not coincide with futures expiration dates. Still, what we think we are seeing is an acceleration of interest rate increases starting as the Fed struggles to control inflation. Inflation has been caused by running the government money printing presses overtime and devaluing the U.S. Dollar with the full support of the Administration, hurting people on fixed incomes badly. But rich Republicans never think about that!

The Fed accommodation period is over. Recovery the financial crisis of 2008 (again brought on by Republicans) left it to the Democrats in their 8-year administration to put the country back on the road to recovery from which it is still benefitting while Trump tries to take all the credit (no thanks to him!) It does appear that the "no-brainer" that bond prices will collapse has a much greater chance of being realized.

Intermarket Analysis

We fed Kansas wheat, Chicago wheat, and soybeans into a neural network to get the following result:

Parabolic Chart

December Treasury Bonds:

Parabolic Chart

Nirvana Chart

December Treasury Bonds:

Initial Chart

News Analysis

There is a coming anticipated equity/commodity washout, and bonds like bad news. It is premature to expect treasury bonds to remain lower in the evewnt that equity market weakness accelerates. A large amount of economic anxiety is populating the headlines. A reduction in the Chinese Reserve Rate Requirement for bank loans is seen as a confirmation of extreme vulnerability of the Chinese economy. That is also a sign that U.S./Chinese trade relations are now threatening the global economy. There is a limit to the safe haven potential of bonds and notes in the face of U.S. jobs data showing a strong U.S. economy. But weakness in energy prices and almost all other actively traded commodities extracts a measure of inflation and rekindles deflationary sentiment that could create a more positive market condition for Treasuries. Traders in bonds are showing a hefty net short position, which could set up a technical short-term bounce in treasury prices. A short squeeze could result in converting economic optimism into economic fear. Bonds are in a very oversold condition.

An impending clash between Rome and Brussels after the European Union criticized Italy's fiscal plans, caused Italian bond yields to jump substantially. This is helping U.S. Treasury yields as well, putting pressure on U.S. bond prices. Federal Reserve Chairman Jerome Powell impled that the U.S. central bank may have more room than thought to lift interest rates. (Bond prices move opposite to interest rates.) A deal between the U.S., Mexico, and Canada in an overhauled NAFTA trade agreement has also helped push Treasury yields higher and bond prices lower. The treasury yield curve is the flattest it has been in 11 years, with the 10-year note interest rate reaching 3.26%.

The bond market had a holiday on Monday, October 8th when the bond market was closed. The name of the holiday was changed to "Indigenous Peoples Day" in several states including OIhio. That helped prompt a selloff before the long holiday weekend as investors did not want to have exposure at a time when Fed interest rates were rising.

An upcoming auction of $230 billion in Treasuries also prompted four days of declines in treasury futures. (The Republicans really ran up the National Debt beyond belief!)

Treasury yields creeping up overshadowed any expectations for a strong corporate earnings season when third-quarter reporting begins. Strong economic readings reinforce the notion that the Federal Reserve will stick to its pace of interest rate tightening this year and next. This is also helping push the U.S. Dollar Index higher as interest rates are a prime attraction for that. Gold, which offers no yield continues under pressure. Higher interest rates will weigh on equities because they stifle economic growth and corporate profits, but help to keep inflation in check.

The coupon rate on a standard U.S. Treasury 30-Year Bond that is used for the futures contract specification is 6%. The implied yield on the futures bond is calculated using the price in 1/32nds converted to decimals. The face value at maturity of that bond is $100,000. Based on a current futures price of $137,280, the implied yield would drop to 4.37%. That would not correspond to yields on recently-issued 30-year bonds because the coupon rate would be less. The current coupon rate is 4.25%. The actual yield on recent bonds obtained at auction is shown in the chart below.

In understanding where we are in the fixed income specter of bond rates, interest rates are being driven higher by the emergence from the post-financial crisis decade-long policy of extraordinary accommodation. It is finally over. The unwinding of quantitative easing will push fixed income yields higher in the coming year. President Trump's apparent desire to rewrite trade rules has been the biggest reason for volatility in stocks and bonds. It all adds up to a bear market for bonds. As this writing goes to press, Nikki Haley has just resigned as Trump's U.N. ambassador. The ambassador did not comment to reporters, but is the latest departure from a host of national security circle employees. We are not sure what effect this will have on markets, but think it is sure to have one, as she was clearly one of the most popular members of Trump's inner circle.

Point & Figure Chart

173.0|                                                                  T 10/ 5
     | IMM - Dec-18 Treasury Bonds, 1/32 pts 100K$ Cm.=0.03  Lim.= 0.6
     |                        X
     |                        XO
     |                        XO
     |                        XO
     |                        XOX
     |                      X XOXO
     |                      XOXOXO
     |                X     XO O O
     |                XO    X    O
     |                XOX X X    O        X
     |                XOXOXOX    O      X XO
     |                XO OXOX    O      XOXOX
     |                X  O O     O      XOXOXO
     |                X          O      XOXOXO
     |X X             X          O    XOX    O
     |XOXO    X       X          O    XOX    O
     |XOXO    XOX     X          OX X XO     O
     |XOXO    XOXO  X X          OXOXOX      OX X
     |XOXO    XOXOXOXOX          OXO OX      OXOXO
     |XOXO    XOXOXOXO           O   O       O OXO
     | OXO    XOXOXO                           OXO
     | O OX   XO O                             O O
     |   OX XOX                                  O
     |   O  XOX
     |     OXO
     |     O
      1          11111           1          1
The above chart is giving a conventional sell signal.

Cyclical and Seasonal Factors

We are headed toward a cyclical high and a seasonal down period.

Cyclicals Cyclicals Seasonals

Internal Program

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

Internal Printout 1 Internal Printout 2

Results of "Volume" for Treasury Bondsd (blue lines = successful trades, red, unsuccessful): (Not 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 $2,530. 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. Commercials with the best track record are getting increasingly-long.

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 change in major trend to up is imminent at a volatility low point.

Range/Volatilitiy Chart

Possible Future Prices

Random Chart

Option Recommendation

Our option trade recommendation is to Buy (1) Treasury Bonds March 134 Put and Sell (1) Treasury Bonds December 134 Put @ 19/32 (0.59375) to the buy side or less.

o 1 o 2 o 5

Calendar Spread

What the Dec. - Mar. 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 0.11 or narrower selling the far as prices are falling and then buying the near, and exiting or entering when it is at 0.88 or wider buying the far as prices are rising and then selling the near. At this time, we appear to be headed toward the buy the near, sell the far point.

Level Table:

Level Table

The path of least resistance is down.
154.0|                                                                  T 10/ 5
 IMM - Dec-18 Treasury Bonds, 1/32 pts 100K$ Cm.=0.03  Lim.= 0.6
     |[   <<<
136.0|-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=-0.019
       1 1 1 1 1 1                                       1           1
       0 0 1 1 2 2 1 1 2 2 3 3 4 4 4 5 5 6 6 7 7 8 8 9 9 0           0
       0 2 0 1 0 1 0 1 0 1 0 1 0 1 3 1 2 1 2 1 2 0 2 0 2 0           0
       9 0 3 7 4 8 3 8 1 5 2 6 2 6 0 4 9 2 6 1 5 8 2 6 0 4           5

Other Factors

Multiple Chart Indicators Summary
Multiple Chart Indicators Summary

Here's an intraday chart for a previous day ( 10/10 ).

Intraday Chart

                 Risk Versus Opportunity Report

                 USZ8    December Treasury Bonds

                      High Price:  139.17
                   Current Price:  137.28
                       Low Price:  133.48

                            Risk: -0.028
                     Opportunity: -0.056

                    (O/R) Ratio =  2.011

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 - 4
Place 5 December Treasury Bonds on a Sell Watch with stoploss @ +2.26 (+2-8/32) below the get-in point when recent price is represented as "136-28/32".