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A Case For Trend Change in 30 year Bonds

by | Tips & Strategies

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.

bonds

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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About John Payne

John Payne is a Senior Futures & Options Broker and Market Strategist with Daniels Trading. He is the publisher of the grain focused newsletter called This Week in Grain, along with being a co-editor of Andy Daniels’s newsletter, Grain Analyst. He has been working as a series 3 registered broker since 2008.

John graduated from the University of Iowa with a degree in economics. After school, John embarked on a 4 year career with the United States Navy. It was during two tours in Iraq and the Persian Gulf where John realized how important commodities are to the survival of society as we know it. It was this understanding that brought about John’s curiosity in commodities. Upon his honorable discharge in 2007, John’s intense interest in the world of commodities inspired him to move to Chicago and pursue his passion in a career in the futures arena.

After a three year position with a managed futures firm specialized in livestock trading, he was given the opportunity to join the team at Daniels Trading. Being in the business and seeing how other IB’s operated, it was the integrity and straightforward approach of the Daniels management team and brokers that attracted him to make the move. Since joining Daniels, John has broadened his fundamental and technical analysis of the markets even further. John has been writing his newsletter This Week in Grain under the Daniels banner since 2011.

Working in high pressure industries like the military and capital markets, John has learned the value of preparation in times of stress. He believes that instilling within his clients the value of a good plan and a cool head for dealing with the day to day swings of commodity markets. He treats every client as a teammate, understanding that his job is to help clients achieve their goals, whatever they may be.

John is a proud supporter of the Iraq and Afghanistan Veterans of America, the Veterans of Foreign Wars and the National Corn Growers Association. When he is not working, he enjoys athletics of all kinds and spending time with his wife and their two kids.

John’s commentary is featured in the following publications:

* All Ag Radio – Sirius Channel 80
* AM 880 KRVN – Lexington, Nebraska
* RFD TV
* Wall Street Journal
* Barron’s
* China News Daily (English version)

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