The interest rate markets have traded more or less sideways for the last year. The markets show true indecision with regards to the medium and long-term interest rate outlook. We’ve seen this in lower overall open interest levels, smaller commercial trader positions and a long bond futures market that seems tethered to the 134 handle. Fortunately, there are short-term trading opportunities within this broad sideways cycle.
We’ve discussed at length the details of the Commodity Futures Trading Commission’s weekly Commitment of Traders report. The general thesis remains the same. We believe the commercial trader group in general, has access to and uses the best information available to define their value price areas in the markets that are responsible for their livelihoods. Value traders in the futures markets sell premium and buy discount relative to their cash positions. Therefore, our analysis focuses on two metrics, their net total position as well as the momentum of their recent buying or, selling.
The commercial trader net position in the 30-year Bond futures is near flat. Their momentum however, is definitely positive. The commercial traders have been solid buyers in three of the last four weeks. Laying their purchases over this futures chart we can see that they’ve bought more than 55,000 contracts between 134 and 136. This shows a strong defense of the 134 double bottom and has proved to be a pivotal price area over the last year. We can also see that their net position has peaked around net long 65,000 contracts. Obviously, they still have plenty buying power left in the bag considering their current net neutral position.
Our analysis suggests that the swing low for this market has been made with nearly a 70% degree of certainty based on their recent behavior. We’ll use the 134^11 lows made in the September 30yr Bond futures on July 3rd as our protective stop point. I expect this rally to eclipse the recent highs at 137^12 and make a run at the May highs of 138^10. We’ll see what the commercial traders do for the rest of this week and adjust our outlook accordingly over the weekend.
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