The eternal question of “If a tree falls in the woods, does anyone hear” has a strong correlation to how positive data for U.S. Treasuries has been unable to stem the negative trend on U.S. government securities. Reception for debt at the longer end of the yield curve (U.S. seven-, 10- & 30-years) has been viewed with some skepticism, as the unprecedented supply of Treasury debt, expected to swell the U.S. deficit, offers significant opportunities for devaluation of the U.S. dollar and a significant ramp up in inflation.
If one wishes to view the pullback in Treasuries in a “glass half full” scenario, the implementation of the capital raised has contributed to a record drop in the Libor rate and demand for higher yielding corporate debt has risen dramatically since February. This suggests a return of institutional demand for risk. With the lights coming on in the morning and telephones still working, few expected 30-year futures to remain above the 140-00 level for very long on their initial run up.
While expectations are that the long end of the U.S. yield curve has not found its bottom yet, it should meet significant levels of support as concerns regarding global second quarter earnings and lower trading volumes offer renewed interest at perceived bargain yields for the immediate future.
Looking at a chart of U.S. 30-year bond futures, one can see that the initial breakdown of support took place at the 123-20 level. This represents the 61.8% Fibonacci retracement of the rally from last fall’s double bottom to the all-time high. Expectations are for the market to set up for range trading throughout the summer. Look for initial resistance in the September contract at the 119-23 level while support on the downside forms at 113-18.5, which is the low close from November. This should represent the bottom of the pullback through the summer. If the initial support at 119-23 is taken out, look for a test of the 61.8% level and for the 119-23 level to serve as a pivot.
Richard Roscelli is a broker for Whitehall Investment Management and an expert on interest rate futures.