US Treasuries: Roll to Labor Day Spreads Ahead of Memorial Day!

Roll With the Punches

On March 1st the IMC blog initiated a couple of short positions on the yield curve.  A short June T-bond/T-note spread was entered at 32-24 and a short June T-note/5-Year note spread was entered at 9-03.5.

We’ve taken some punches on these spreads since we got in them, but not enough to knock us out of the game yet.  For instance, we were risking a two-day close above 35-19 on the June T-bond/T-note spread.  The spread made a one-day close above this level on April 7th and a one-day close above this level on May 13th (a Friday the Thirteenth, no less!).  It was close, but we survived it.

Due to the First Notice Day for the June futures contracts next week, the positions needed to be rolled to the September contracts.

The Lay of the Land

Fundamentally, decent economic data and comments from several Fed members –including Janet Yellen- have substantially increased the odds of another rate hike in June or July.  This helped cap the rally in the US treasury market.

June T-bond T-note spread daily

June T-bond T-note spread daily

Technically, a double top appears to have formed on the June T-bond/T-note spread at the April 7th and May 13th highs, both located at 35-24.  To confirm this ominous pattern, the low between the two highs needs to be broken.  That low is located about two full points from here at the April 26th low of 32-01.5.

T-bond T-note spread weekly

T-bond T-note spread weekly

Resistance for the T-bond/T-note spread is apparent on the weekly time frame as well.  The 2015 peak was established at 35-26.5 and the spread topped out at 35-22 in February and 35-24 this month.

Closer in on the yield curve, the June T-note/5-Year note spread hit a wall of resistance as well.  The spread peaked near 9-30 on February 11th and then it put in some slightly lower highs of nearly 9-22 on April 7th and 9-21.5 on May 13th.

June T-note 5-year note spread daily

June T-note 5-year note spread daily

In light of this, the plan is to roll to the September spreads and risk a breakout above the April/May highs.  We’ll come back and talk about increasing the position size only if the US treasury spreads get well below their April lows.

Trade Strategy:

T-bond/T-note Spread

Liquidate the hypothetical short position in the June T-bond/T-note spread and simultaneously enter a hypothetical short position in the September T-bond/T-note spread at the market-on-close on Tuesday, May 24th.  Risk the September spread to a two-consecutive day close above 34-19.

T-note/5-Year-note Spread

Liquidate the hypothetical short position in the June T-note/5-Year note spread and simultaneously enter a hypothetical short position in the September T-note/5-Year note spread at the market-on-close on Tuesday, May 24th.  Risk the September spread to a two-consecutive day close above 10-06.

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