T-bond/T-notes Spread: Interval Ladder Strategy Update

The T-bond/T-note Spread Interval Ladder

On October 25th we instituted a hypothetical trade campaign for the T-bond/T-note spread. The objective was to get short and add to the position by using an interval ladder.

Due to the approaching First Notice Day for the December interest rate contracts, we are moving out to the March contracts. The March T-bond/T-note spread is trading at a discount to the December T-bond/T-note spread, so we will adjust the price intervals accordingly.

On the weekly nearest-futures chart, the rising 20-bar Moving Average provides technical support at 14-05. The spread has not closed below the weekly 20-bar MA since the first week of January, so such an event will trigger a bearish trend change signal.

March T-bond T-note spread daily

March T-bond T-note spread daily

On the daily timeframe, the March T-bond/T-note spread posted a low of 13-25.5 in late October. So far, the low for November has been 13-28.5. Since the spread has recovered two-thirds of the pullback from the contract high and we only have three trading days left for the month, odds are pretty good that the low for November is in place. Therefore, we are going to use a break below the November low and the late November low to kick off the short sale campaign.

Trade Strategy:

The blog will cancel all previous hypothetical orders to sell the December T-bond/T-note spread. Now, the blog will work hypothetical orders to sell one March T-bond/T-note spread on a close below 13-24 (premium T-bonds). If filled, the position will be liquidated on a two-consecutive day close 2-08 (two and one-quarter points) above the entry price. In addition, continue to short more March T-bond/T-note spreads (single contracts for sake of simplicity) on each close that is 2-08 lower than the prior entry price until a total of four units (the initial entry plus three ‘add-ons’) have been accumulated. For a trailing stop, all units will be liquidated on a two-consecutive day close 2-08 (two and one-quarter points) above the most recent entry price.

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