Five-year Treasuries: Still room for selling?

Five-year Treasuries were hard hit last week and we wonder aloud if there is room for further selling this week. Rising first on Monday to a new 6-week high, FVM4 closed lower each session of the holiday shortened week. On Thursday, the futures contract (CBOT:FVM14) fell back within the two week consolidation band which followed the post-March FOMC meeting sell-off. It was somewhat curious that there was no overriding safe haven bid going into the long weekend given continuing developments in Ukraine.

The belly of the curve attracted selling last week as economic data started to confirm that severe weather did indeed play a significant role in weakness over winter months. It will require still more data to satisfy many that the underlying trend for growth is expanding rather than fading. One area of concern for some has been housing which until the mid-’13 "taper-tantrum" had been consistently strong. Last week we learned that Housing Permits fell slightly in March and Starts, while rising, did not meet more optimistic expectations.

Tomorrow home prices from March are expected to be flat from February and Existing Home Sales are projected to be slightly softer. New Home Sales on Wednesday however are projected for modest gains over the prior month.

Open interest rose in 5-year Futures last week by 52,000, with most of those gains coming on Thursday (+42,000) as the June 5-year Treasuries fell over a point from the weeks high with a third of that on Thursday. The rising open interest helps to support the emerging bearish trend. Additionally, the CFTC reports that "non-commercial" accounts remain well short of Five Year Futures. A small paring of net short ‘futures and options’ combined leaves these accounts close to 8 year extreme in net-short (chart).



Technically, FVM has fallen in a tight and steeply sloped band over the last week with today’s price action is testing the upper bound of that channel. RSI (14-day) fell to 44 on Thursday and is marked at 46 today. A settlement both today and tomorrow remaining below 119-065 will help to confirm the bearish implications of Thursday’s decline. Otherwise, the turn last Monday is significant as it occurred near 4 month highs, failing at a test of the 200 day moving average.

Those expecting a strong move this week, but not convinced on direction might consider the FVK (4-day) 118.5 119.5 strangle which trades at 3 bid/4 offer, reference futures 119-03.25. Otherwise, unless FVM settles above 119-065 by tomorrow, the prospects appear to have turned more negative.

 



About the Author

Martin McGuire, managing director at TJM Institutional Services

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