Many times, changes in trends come from the outcome of the biggest events. The conclusion of the latest calamity out of Washington and the recent appointment of the dovish Janet Yellen to replace Ben Bernanke may be what the bond market needs to wake up from its recent 6 month slumber.
As a fundamentalist who leans on technical for his entries, below is the evidence I am using to build a case for getting long bonds.***
Fundamental:
- Fed governor Yellen, who has a reputation as someone who supports QE and is expected to be softer than “Helicopter” Ben Bernanke on monetary policy, was just appointed Federal Reserve Chairman. The news of this appointment coincided with the recent bottom in price (yes, I know correlation is not causation).
- The default fears (people sell bonds when they don’t think they will get paid back) caused those who are the heaviest owners of bonds, like China and Japan, to ramp up their rhetoric and call for the US to “do the right thing.” I heard one analyst say, “The US bonds are now a safe haven again.” This should bring the big players who need a place to park cash back to the table for more buying.
- The Fed has been very consistent with their desire to get the US unemployment rate below 6.5%. I do not see any change to monetary policy until that occurs. At the current rate of 7.3% if the recent trend holds, I do not see unemployment at 6.5% until July of 2014. This should encourage the fed to keep their foot on the QE gas for the short term, keeping bonds on bid.
Technical:
- I see a potential breakout/trend change occurring. The 100 day MA has not provided much resistance over the past year. Only once has the market stopped there (Dec 28). In fact, anytime we have traded through it and closed, the market saw follow through.
- The cross of the 9 and 14 day MA’s is a good time to get into a market on a momentum play, in my opinion. We got that cross on Thursday. Caution is always encouraged, which is why we will use a stop.
- Open interest is full of new shorts over the past 6 months. They will buy to exit on any upward momentum, which only helps our case.
There’s my case for buying bonds. If you are getting long on this recommendation, aggressive traders should risk a stop down below 130 (potential inverted head and shoulders), which will be a risk of $4000 if filled at 134-00. More conservative traders can get closer, using a stop of somewhere below 132-00. If you are adverse to margin, long calls are a good tool.
***For those new to bond trading, it’s important to understand one thing. When interest rates fall, the prices people pay for bonds go up. The recent sell off in 30 year bond prices (above) corresponds with the hikes we have seen in products.
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