Something BIG & NASTY About To Happen To US Treasury Bonds ?

The "flight-to-quality" buyers who propelled US Treasury futures to new all-time highs seem to have moved on to other investments lately, leaving the Bond bull market vulnerable to new selling pressures. The recent break in Bond prices may be tied to an eternal hope that European leaders will finally come to an agreement on how to handle the mounting debt crisis, as well as finding ways to secure the balance sheet of European banks stuck holding the sovereign debt of struggling European nations. If an agreement is reached, it may reduce the possibility of a return to a global recessionary environment, which was one of the major fears that propelled US treasuries to their lofty heights. There are some concerns that Chinese buying of US Government debt is beginning to wane, as one of the largest foreign holders of US treasuries begins to diversify its foreign exchange holdings. Should the Chinese begin to liquidate these holdings, it could put severe pressure on Bond prices, as interest rates would most likely have to increase to entice other buyers into the US debt market. So far, other foreign buyers are taking on any slack from the Chinese, so the effects of reduced Chinese purchases have been mooted. Longer-term, traders will need to focus on what the Federal Reserve will do if the US economy continues to demonstrate anemic growth rates. There has been some talk of a potential QE3 being put into place over and above its current "operation twist", in which the Fed has extended its buying of treasuries further out on the yield curve. If QE3 does materialize, it may further extend the treasury bull market much longer than global economic conditions would suggest.




Technical Notes

Looking at the daily continuation chart for Treasury Bond futures, we notice what might be a "double-top" technical formation. The recent failure of a move above the all-time highs made back on September 23rd sparked renewed selling, which culminated in a nearly 8-point price break in only 5 trading sessions. Since that time, Bond futures prices have consolidated in a relatively tame 4-point range on lower than average trading volume, as many traders are starting to take a wait-and-see attitude on any announcement from the conclusion of the EU summit. The short-term seems to favor Bond bears, as prices are holding below the 20-day moving average. The 14-day RSI is turning neutral, with a current reading of 47.70. The next major chart support point appears near the 135-00 level, and if this level fails to halt the sell-off, we do not see much support until prices move toward the 200-day moving average, currently near the 127-08 area. Chart resistance is found at the recent high of 141-00, and above this near the 142-00 area.