It appears that both bullish and bearish Treasury bond traders are beginning to dig in for a protracted battle to see which side will prevail in determining the next move in Bond yields. As is typically the case, both sides make compelling arguments to back their positions. Bond bulls will argue that there are no signs of an immediate turnaround in the U.S. economy, with Friday's non-farm payrolls report confirming another 651,000 jobs lost in February and that the unemployment rate has soared to 8.1%. If one was to factor in involuntary part-time workers or those employed on a temporary basis, the rate would be even higher! Bond bulls also note the possibility of the Fed. purchasing treasuries should rates begin to climb. This idea was backed-up by the announcement from the Bank of England that it would purchase both government and corporate debt.
Also supportive is the perceived "safety of funds" in U.S. Government debt, with many investors flocking to U.S. treasuries in times of economic or political turmoil. On the other side of the coin, Bond bears will counter that the massive size of the U.S. stimulus package and the rising costs of government "bailouts" has to come at a price, and that price is the increasing amount of debt the treasury has to sell to fund the costs of these programs. This week alone the Treasury will auction off $34 billion of 3-year notes, $18 billion of 10-year notes, and $11 billion of 30-year bonds.
At what point will investors start to demand a higher yield to keep taking on U.S. debt issuances, especially with no clear signs that The U.S. Government's spending spree will slow down anytime soon? Even a rebound in the economy may prove to be bearish for Bonds, as investors start to dump treasuries in favor of stocks once again, when share prices begin to recover and equities are not the pariah they seem to be today.
A quick look at the charts seems to suggest we have entered a period of consolidation since late January. I have included Fibonacci points on the chart starting at the recent lows made in late October of last year to the contract highs of January. Notice bond prices retraced back into the zone between the 50% and the 61.8% retracement area. This can be viewed as a critical support point for Bond futures if the rally continues.
A failure of support near the 124-11 area in March bonds or 123-04 in the June contract could signal the January highs may have been an important top in the market and bears look likely to finally gain the upper hand. Traders unsure regarding which side will win the battle for Treasury prices may look towards the options market and investigate the possible purchase of straddles or strangles in anticipation of a large directional move once the consolidation phase is over.