Friday, April 24, 2009

Note Rates Hit 3%

Ten Year Note rates tested the 3.00% level at the end of trading today marking the first time rates have touched this level since the Federal Reserve announced its long-term security purchase intention. Rates continued advancing despite continued weak economic news. Durable goods orders again slipped. Orders data has fallen now in seven of the past eight months.

Concern exists over how the markets will react to an additional $100 billion + in new securities being auctioned off next week. Of this amount, some $30 billion of debt will be in the 7 year, intermediate range.

We had been watching the rising trend in rates. In earlier blogs, we noted that rates were testing the red channel line and mentioned that we were positioning ourselves for higher rates.

Rates tried to fall today after the 1 pm CDT release of the Bank stress test results. Little information was provided on banking weaknesses and the market tone weakened. Stocks gave up much of their earlier rally and treasury rates headed down. But in the final 15 minutes of trading, rates rallied trying hard to penetrate the 3.0% level. Today marked options expiration day for the May Treasury futures making it hard to distinguish what was real market movement as opposed to activity targeting a certain strike price. A popular option strike price was 121-16. Note prices touched 121-165 before finally settling at 121-175.

We believe that the upward move will continue. The Weekly Size chart above shows that volatility is starting to rise. When Size is rising, one should stick with the trend. The moving average on the Size chart is 0.24 while the latest data point is 0.12. Volatility can at least double from the current level.

A longer term view of the note rates show that there is a significant falling trendline that comes in around 3.20. Note rates have not had much success in getting through this resistance level since the downtrend began almost two years ago.

Should rates break above the 3.2% level, expect some resistance at the last low of around 3.35%. While resistance levels could be important, one must consider the magnitude of the move that we have endured. Rates have fallen from a high of 5.2% to a weekly closing low of 2.13%. Note how the stock market has made a major move in the recent two months perhaps only because it has been so oversold. Interest rates, having fallen by so much, could easily rally sharply, retracing much of the down move.

While the Federal Reserve may intervene to keep rates lower, the increasing debt supply, over $100 billion each month, is sure to eventually take its toll on rates. The global market is much bigger than the Fed. While we will have to see how rates react when hitting the 3.2% level, I will continue to position my trading stance for higher rates.

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