T-bond/T-note Spread: Another ‘Add-On’ Setup Has Materialized

T-bond/T-note Spread

The blog is currently holding a short position in the June T-bond/T-note spread from the equivalent of approximately 35-08 (premium T-bonds). The initial position was entered in the March spread on February 6th.

An ‘add-on’ was entered on February 20th. This second position in the June T-bond/T-note spread is currently short from the equivalent of approximately 32-30 (premium T-bonds).

On Thursday the spread closed at a new multi-month low of 25-18.5. At that point, the six-week decline of nearly eleven full points from the April Fool’s Day high was similar in size and duration to the five-week decline of the eleven full points from the January 28th all-time high to the early March correction low. Therefore, the two-day bounce that followed was not a surprise. It could have even been the start of a new bear market rally.

June T-bond T-note spread daily

June T-bond T-note spread daily

Since peaking at a secondary (lower) high on April Fool’s Day, bounces in the June T-bond/T-note spread have been one to three-day affairs. Therefore, a break to new lows after the recent two-day bounce could indicate that the bearish pattern is still intact and that the symmetry of price and time will be broken. This could keep the spread on course for a return to the mid-October low of 14-07.5.

The short-term bounces offer a low-risk entry for short sellers to enter on a break to new corrective lows and risk just above the preceding bounce high. The low risk on the trade, combined with a sizable downside target, creates a lucrative reward-to-risk scenario. Traders who are already short could use this setup as an opportunity to increase the position size again.

Trade Strategy:

The blog will make a hypothetical ‘add-on’ trade by selling one June T-bond contract and simultaneously buying one June T-note contract on a close below the May 13th low of 25-18.5. Initially, this ‘add-on’ position will be liquidated on a two-consecutive day close 8/32nds (one-quarter of a point) above the highest closing price between the May 13th low and the entry day.


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