Morning Futures Roundup

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Economic Optimism Sinks Bonds
 Fundamentals

Bond futures are lower once again this morning, as the treasury market is unable to find solid footing in what has turned out to be a bullish and inflationary environment. Bond prices have drifted lower and lower after peaking near the beginning of the month. Equities have gotten stronger during the same period of time on better than expected economic data and earnings. There is genuine concern that equity valuations have gotten out of line with growth forecasts, given the fact that consumer spending has shown zero signs of life.

It would, however, be foolhardy to try to swim like a salmon against the current and try to predict a top in the stock market. Likewise, it would be difficult to gauge where this decline in Bond prices will end. Even if equity prices were to fall back, there is no guarantee that Bond prices would firm up, given the inflationary pressure facing the global economy. Gold has been a much more favorable investment in times of high inflation, and cautious investors have been flocking to the relative safety of the metal at the expense of fixed income instruments.

Bond traders may find support from the FOMC, as the Fed has maintained that its expansionary policy will likely continue for some time. This is not likely to accelerate upside moves, but rather, offer a cushion to the downside. At this point, Bond traders may hold out hope that China’s expansion cools off - not a very likely scenario at this point - to relieve inflationary pressure. The industrial giant has stoked the inflationary oven by buying-up raw materials, causing commodity prices to shoot upward. The treasury market may find some minor support if equity prices do turn downward and traders become more pessimistic about the state of the US economy.




Technical Notes

The December Bond chart shows prices coming down to test support near 117-20. This area can be seen as significant support, and how the market behaves here could very well decide the fate of the Bond market in the near-term. A breakdown here could send prices into the low-to-mid teens. However, if prices are able to gain traction here, prices may find themselves range-bound in the high teens or possibly push into the twenties.


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Prices have also come down to the 100-day moving average, which could offer some support to the Bond market. The full stochastics have come down to oversold levels, which could also bolster prices in the near-term.


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