This week will be a short myopic view of the internal workings of the interest rate futures market sector focusing on a potential short selling opportunity in the 10-year Treasury Note futures.
The setup for the trade begins with the yield rally from April - May. We'll pick it up on the chart below, beginning May 1st. The small differences in nominal interest rates compresses the data too much to show clearly. Therefore, I've excluded April's data for scaling.
Looking back six weeks ago with the FOMC meeting, we noted that commercial traders had been aggressive buyers heading into the meeting. We also plotted their success at predicting future market direction after the meetings on this chart in, "Commitment of Traders Report Sees Dovish FOMC." The resulting long positions we created in response to their actions were quite timely.
Both the short and long ends of the yield curve have stabilized since last month's meeting. The current trade setup involves the pricing distortion between the 10-year Treasury Note and its current point in the yield curve between the 5-year Treasury Note and 30-year Treasury Bonds. The yield on the 10-year Treasury Note climbed from 2.19% on June 1st up to 2.43% by July 1st. That's an 11% jump in yield. Meanwhile, the 30-year Bond's interest rate climbed from 2.94% to 3.2%, a climb of only 4.3%. The 10-year Treasury Note has created a pothole where the commercial traders are expecting a speed bump. We'd like to ride the commercial traders' building process to profits.
Structurally, I expect this to play out as a false breakout higher to be followed by a reversal back to the downside off the May-present trend line. The recent consolidation is suggesting we may breakout above this week's high of 127^09 bound by the first trend line but maintain the integrity of the upper trend line coming down from the all-time high near 130 set this January. Time will force the market's hand one way or the other as the consolidation tightens. We like siding with the short sellers but, we'll wait for our price and continue looking for pricing discrepancies that will allow for a low risk entry point as we favor the short side toward higher rates.
