Wednesday, April 1, 2009

Interest Rates Set For Upmove

Monthly Report - Part 2

Long-term interest rates fell in March but as the chart of the 10-year interest rate index (TNX) illustrates, the rate found support at the 4-month moving average and appears to have successfully completed a three-month-test of the lows. With this in mind, we need to be looking for an entry position to be short treasury bonds and notes. For those with a heavy bond allocation in their investment portfolios, be sure to have your adviser monitor this and shift out of long term bonds to a shorter maturity or cash.

On a shorter-term outlook, the 10-year rates appear to be continuing to head lower so you may wish to hold off before making a decision. I will watch it closely so you can monitor the blog to see when I take action. As the weekly note rate chart below shows, the rate has been hitting overhead resistance and appears to be headed lower.

Lower rates seem to be the normal thought now as employment numbers continue to worsen and the potential bankruptcy of General Motors and Chrysler weigh heavy on the market. First quarter earnings will be coming out as well. While few have high expectations for improved earnings, reports coming in at worse-than-expected levels could send shivers through the Treasury markets, especially considering the rosy reports banks were giving recently, telling the public that January and February were profitable months. The final wildcard is the Fed. What kind of impact will their purchases add on rates?

The weekly chart illustrates the persistant downtrend on rates with significant resistance coming in at the 2.83% and 2.91% levels making it hard to reconcile the monthly chart showing the potential for a directional change in rates. But it could happen. In general, the treasury market is spooked by the heavy supply of bonds, notes and bills that are continually coming into the market to support the trillions of dollars in spending that President Obama is proposing. When this thought prevails, rates rise. Another factor that cannot be ignored is the G20 meeting that is about to get underway in Europe. News about the dollar could have an impact on rates.


The volatility level for the 10-year note continues to drift lower and lower and is currently well below the average. For bond and note option premium sellers, this low level of volatility needs to be taken into consideration before selling short. Not only does low volatility translate to low option premiums, there is also the risk that a volatility spike could turn your far out-of-the-money options into in-the-money positions.

I will be watching for a bottom in the rates. At that time, you could consider a number of instruments to take advantage. For stock portfolios, consider the Short and Ultra Short Bond ProShares. These instruments will rise in price as interest rates rise. For well-capitalized players, consider entering into a short 30-year bond or 10-year note futures position to maximize your profit potential. For those who wish to make some money with less risk, consider selling out of the money bond and note call options.

Be sure to work with a futures investment professional to advise you on such strategies. Futures trading is very risky but when done right, can give you great profits in any kind of market.


Despite the low level of volatility during March and the sharp move in price caused by the Fed’s announcement to buy long-dated treasuries, our futures options trading positions returned $915 per $10,000 investment net of transaction costs. I enter April short options with a bias to the upside for bonds. I will be watching for a reversal soon and expect bonds to fall by the end of the month.

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