From the March 01, 2009 issue of Futures Magazine • Subscribe!

Bonds correct

While Treasuries have pulled back from their all-time highs of 141-28, they are still trading at elevated levels. “People suddenly realized that the lights still come on and 93% of us are still employed,” says Richard Roscelli of Alaron Las Vegas. The flight to quality continues, but most companies continue to service their debt and he says high-yield bond funds may be worth a roll of the dice, considering the decline of the stock market and low yields on Treasuries.

Demand for two-year notes and shorter-term debt remains high, but farther out, inflation fears are cooling demand for Treasuries. In March, he says the 30-year Treasury futures will test 125-12 and could break to 123. Resistance is 127-25.

“The current nuance in the market is that people are worried short-term about a period of deflation; longer term, inflation is a concern. The market hasn’t figured out how to play that,” says Robert J. Griffin, independent bond trader. The dilemma is that bond prices are too high and yields are too low. He says 30-year futures will be range bound between 123 and 131 for a long time.

Jack Broz, publisher of the MarlinLetter.com, says prices are lower due to the influx of new issues, but expects the Fed to buy Treasuries in an effort to lower mortgage rates, rebuild consumer confidence and spur spending. Support is 126-02, resistance is 140.

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