Traders Turn To Bonds As Equities Stumble
Today’s Spotlight Market
Here in the U.S., treasury futures traders appear to be covering short positions ahead of the FOMC meeting scheduled for January 28 and 29th, as well as the upcoming debt ceiling deadline on February 7th. The Commitment of Traders report showed both non-commercial and non-reportable traders holding a net-short position as of January 14th. This sets the stage for potentially futures gains if the flight from emerging market currencies persists.
Fundamentals
Traders and investors who have been panning the ownership of U.S. Treasuries the past several months have all of a sudden taken a renewed interest in this beleaguered asset class as weakness in emerging market currencies coupled with the first ?significant? correction in U.S. equity prices in months has investors moving to ?safe haven? assets.?
Ironically, one of the catalysts for this move to more ?risk adverse? assets is the expected continued tapering of bond purchases by the Federal Reserve. Some of the excess liquidity created by polices such as ?quantitative easing? had found its way into investments in emerging markets in hopes of generating above average returns.
Now that it appears that the Fed is beginning to slowly push on the brakes of its monetary stimulus, investors are beginning to move funds out of emerging nations as growth rates have begun to slow and concerns over the political and financial stability of countries such as Turkey, Argentina and even Brazil are now being questioned.
The value of the Argentinean Peso has fallen sharply as the country?s government has ceased supporting the currency in the forex market. In addition, the value of the Turkish Lira has plunged to a record low versus both the U.S. Dollar and the Euro as traders do not believe that central bank intervention to support the currency will be successful given the low amount of the country?s foreign reserves, unless interest rates are raised.
U.S. equity markets have also begun to feel the effects of investor nervousness, with the ?blue-chip? Down Jones Industrial Average looking to post the largest weekly decline in over 18 months after trading at record levels just a few short weeks ago. Those willing to hold long positions in U.S. Treasuries were beneficiaries of this investor nervousness as the yield on the 10-year Note fell below 2.75% after trading above 3% at the start of the year.
As we start the new week it shall be interesting to see if traders? nerves have been calmed over the weekend or if investors will continue to give the ?cold shoulder?, kind of like this year?s harsh winter weather in the U.S, to ?risk assets?.? ?
Technical Notes? -? View Today’s Chart
Looking at the weekly continuation chart for 10-year Note futures (symbol TY), we notice that the uptrend drawn from the major 2007 lows have been breached and the market has begun a consolidation phase between 122-00 and 128-00 for the past 6 months. For long-term traders, the bull market is still in force and would take a weekly close below the 110-00 price level to stop the bull in its tracks. Support for the front month March contract is seen at 122-03.5 with resistance found at 126-25.
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