T-bond/T-note Spread: The Entry Signal Was Triggered For a Short Sale

T-bond/T-note Spread

On February 6th the March T-bond/T-note spread made a two-day close below the rising 30-day Moving Average for the first time since late September. This signaled a bearish trend change on the daily timeframe and triggered a short sale signal.

The IMC blog made a hypothetical trade by selling a March T-bond contract at approximately 147-21 and simultaneously buying a March T-note contract at approximately 128-23. This puts us in a short spread position at approximately 18-30 (premium T-bonds). We will initially liquidate the spread on a two-consecutive day close above 20-31, which is 8/32nds (one-quarter point) above the January 28th contract high at 20-23.

T-bond T-note spread daily

T-bond T-note spread daily

In addition, the ‘add-on’ strategy to short more spreads on the way down still stands. We are using intervals of two and one-quarter points, so the next ‘add-on’ will be triggered on a close at 16-22 or lower. We will keep the hypothetical orders working to short the March T-bond/T-note spread (single contracts) on each close that is 2-08 lower than the prior entry price until a total of four units (the initial entry position 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.

Friday’s better-than-expected jobs report may have been the straw that breaks the camel’s back. The average job gains over the last three months was the strongest since 1997 and average hourly earnings made the biggest jump since November of 2008. This revived speculation that the Fed will begin raising interest rates this year after all.

If the T-bond/T-note spread can make an end-of-week close below the rising weekly 20-bar Moving Average (currently around 17-00) for the first time since January 2014 it will confirm the bearish trend change from the daily timeframe and potentially usher in a multi-month decline.

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