From the July 01, 2012 issue of Futures Magazine • Subscribe!

Treasuries stuck in Groundhog Day

Uncertainty over the sustainability of an economic recovery and big questions about the future of Europe and the euro are repeating for a third straight year and are driving Treasury bond yields and prices to record levels. Those central factors impacting interest rates are unlikely to change much in the next few months, analysts and bond traders say.

“The bond market is going to stay about where it is and maybe even move higher,” says Justin M. Shea, president of Qualitative Capital Management Inc. “A lot of that depends on what’s going on in Europe. Europe’s situation right now is probably the dominant force in the Treasury market simply because it’s a flight to quality trade, which was something we witnessed last August.”

Carley Garner, senior analyst and broker with DeCarley Trading, says that it is not a secret that “Treasuries are overpriced and yields are low, based on everything that seems logical. Nonetheless, the Fed has dedicated a large amount of capital toward influencing prices. It also has declared an intention to continue doing so into 2014.” As such, she says it is difficult to justify expectations of a reversal in the third quarter, as many continue to expect.

Garner notes that seasonal pressures in government-issued bonds and notes tend to be supportive to bullish for much of the summer and early fall, partly because of investor allocation away from equities as they “sell in May and go away.”  The corrections in the last week in May and first week in June are the exceptions, she says.  

“With these factors in mind, Treasuries will find comfort at prices well off the May highs, but still are relatively high based on historical standards,” Garner adds. She expects the September 30-year bond future will find a home in the low 140s, range bound between 143 and 139, and the September 10-year note contract will settle in the low 130s, range bound between 131 and 129-15. 

Europe’s central role in the market also is cited by Jack Broz, a Chicago Board of Trade (CBOT) floor trader who also provides analysis on the bond market at “They’ve kind of moved Greece behind them, but you’ve got Spain now. Then you have Portugal and Italy. It’s just an endless list,” Broz says. “Whenever those get in trouble — even though we laugh over here because of these yields they are trading at — the money flies into the bonds and notes. This keeps pushing the market higher.”

Broz points out that forecasting is somewhat hazardous because of potential Fed action, but at the end of May he was looking at a trading range for 10-year September notes of 132-05 to 134-23. “Now we’re trading at 134, so we could be through these in the morning. But if you’re through those, you have to think that the market is taking out any possible resistance and wants to keep running,” he says. 

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