Bund/BOBL spread: Exit June Contracts

Move to the Sidelines

The IMC blog is holding a short position in the June Bund/BOBL spread that was originally entered on October 10th.  Due to rollovers, the entry price is the equivalent of 30.73.

The nearest-futures Bund/BOBL spread has been stuck in a consolidation zone for the last few months.  Initially, the trading range was defined by the price range that followed the bounce in the second half of December.  But a failed breakout above the range in late February and a failed breakout below the range in early March reset those boundaries.  After that, it’s been about as exciting as watching paint dry.

Bund BOBL spread (nearest-futures) daily

Bund BOBL spread (nearest-futures) daily

The September spread is priced more than a full point higher than the June spread and is currently trading higher than the late February price peak, basis the nearest-futures.  Therefore, the expiration of the June contracts will cause the nearest-futures chart to show a breakout above the top of the range.  This is bullish price behavior and not a good development for bearish bets on the European yield spread.  On this basis, the blog is going to simply exit the June spread without entering a September spread.  In other words, we’re not rolling over.

Since at least December, the September Bund/BOBL spread has made a series of higher lows.  A double top that was established at the January and February highs was surpassed at the end of April below a pullback occurred into the first half of May.  This is bullish.

The spread has been in an upswing since the May 9th correction low was established 29.95.  So far, three-quarters of the pullback has been recovered.  Things still look good for the bull side of the spread.

September Bund BOBL spread daily

September Bund BOBL spread daily

A break of the May low would throw a wrench in things as it would put the nearest-futures spread back into the trading range and also crack near-term price support for the September spread.  This would be a good reason to reenter a short position.

Trade Strategy:

Exit the hypothetical short position in the June Bund/BOBL spread at the market.  Work a hypothetical order to short the September Bund/BOBL spread on a close below the May low of 29.95.  If filled, liquidate the position on a two consecutive day close above the contract high that precedes the entry (currently at 32.15).

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Bund/BOBL Spread: Roll to June

Thinking About Summer

The IMC blog is holding a short position in the March Bund/BOBL spread that was entered at the equivalent of 31.93 on October 10th.  March contracts expire soon, so we’re going to roll to the June contracts.

The June spread closed at 28.94 on Friday, which is nearly a one and a quarter point discount to the March spread.  This puts the new spread right at a support zone on the weekly nearest-futures chart between the December and January lows of 28.91 and 29.09, respectively.  Once this support level is broken, there is nothing to stop the Bund/BOBL spread from descending to the next technical support level at a weekly Fibonacci .618 retracement at 26.13 (as measured between the 2015 low and the 2016 high.

euro-bund-euro-bobl-spread-weekly

Euro Bund Euro BOBL spread weekly

If the spread does not end its decline somewhere around this important support level, it may try to replicate the 9.40-point decline from last year’s record high.  If so, the next downside target will be at 24.74.

Trade Strategy:

Exit the hypothetical short March Bund/BOBL spread and simultaneously enter a short June Bund/BOBL spread at the market-on-close on Monday, March 6th. 

T-bond/T-note Spread: Time to Get Short?

Dead Cat Bounce

The US treasury market spent the last half of 2017 going straight down.  An improving economy, a December rate hike with the prospect of more to come, the post-election stock market explosion, and ideas that a Trump victory will make things even better have caused traders and investors to abandon bonds as quick as possible.

For the last month, however, the treasury market has bounced back on ideas that the meltdown has been overdone.  From a technical standpoint, this looks like nothing more than a “dead cat bounce” or a correction in an overall downtrend.  If so, this is a short sale opportunity.

Yield Curve Spread

As readers know, the IMC blog is all about trading the intermarket spreads.  Treasuries are no exception.  Therefore, our interest lies in identifying trade opportunities in the T-bond/T-note spread.  Old time traders may remember this one as the NOB spread (Notes Over Bonds).

One thing you may notice on the blog is that we often trade the T-bond/T-note spread at a ratio of 1:1.  Many yield curve traders do this spread at a ratio of 3:1 where they have three ten-year note contracts for every one thirty-year bond contract.  This is done to account for the higher volatility on the longer end of the yield curve and smooth out some of the volatility.

The reason I have always done a ratio of 1:1 is to get positioned for a more directional bet.  This allows me to take a smaller spread position that I would have to do with a 3:1 ratio to match my risk appetite.  It also means I pay less in commissions.

There’s no right or wrong here.  It’s a choice to make based on your personal preference.

The Last Few Weeks

The nearest-futures T-bond/T-note spread rallied nearly three full points off the December multi-month low.  This bounce is a little bigger than the two and a quarter point bounce off the September low.

So either this is an ‘overbalancing of price’ that marks a trend change…or it’s the perfect place for the decline to quickly resume and take the T-bond/T-note spread to new lows.

I’m sure someone reading this is saying, “Gee, smart guy, that’s not much help.  You’re saying it could go either way then!”  Well, that’s just the first observation of the recent price action.  Let me put another layer of technical analysis on top of that to bring some more clarity.

Trend Parameters

Most market technicians are familiar with the 200-day Moving Average.  It’s probably one of the first things you learned about when you started charting.  The 200-day MA is a cornerstone metric used to determine the long-term market trend.

In late February of 2014, the nearest-futures T-bond/T-note spread made a sustained close above the 200-day MA for the first time in nine months.  This bullish trend change signal did its job well as it carried the spread higher for nearly two and a half years.

Who says that trend following is dead?!

Now, we do have to acknowledge that there was a brief period of choppiness in late 2015 when the spread dropped below the 200-day MA in the first part of November for a few days and recovered.  It then dipped back under the 200-day MA again for a few days at the December and recovered right after the new year began.  These were both false bearish trend change signals.  Other than that, though, the spread maintained itself above the 200-day MA.  So it still works a lot more often than not.

After topping at a record high last July, the spread pulled back, hit a trading range for several weeks, and then started to work lower again right after Labor Day.

On September 16th the T-bond/T-note spread came within spitting distance of that widely-watched 200-day MA.  Apparently, the significance was not lost on market participants because that’s where the big bounce happened that we talked about earlier.

The Game Changer

The bounce off the mid-September low faded as the third quarter drew to a close.  Then something very significant happened in the first week of October: the T-bond/T-note spread dropped to a new multi-month low and made a sustained close below the 200-day MA for the first time since the first week of 2016.

This was a major bearish trend change signal.

t-bond-t-note-spread-200-ma-daily

T-bond T-note spread (200-day MA) daily

Over the next two months, the T-bond/T-note spread dropped an additional nine full points.  That’s a big deal in Treasuries!  This spread is in a bear market, folks.

Zooming In

Take a look at how the spread has reacted to the 50-day Moving Average as well.  After peaking in early July and then hitting a trading range in August, the T-bond/T-note spread made a two-day below the 50-day MA for the first time in over three months.

In the first part of September, the 50-day MA also started to roll over.  This tipped the scales further in favor of the bears.

t-bond-t-note-spread-50-ma-daily

T-bond T-note spread (50-day MA) daily

Interestingly, the rally off the December low pushed the spread up enough to finally get a close back above the 50-day MA this week.  This is either an early warning that a bullish trend change is coming or it’s the maximum stretch point before the rubber band snaps back.

The spread is starting to sell off today.  A close under the 50-day MA today could indicate that technical resistance held and that the bounce is over.  Therefore, this provides a setup for a short sale.  We are willing to take it and see if this Friday the Thirteenth is our lucky day.

march-t-bond-t-note-spread-daily

March T-bond T-note spread daily

Here’s one more for the road: On November 3rd the 50-day MA closed below the 200-day MA for the first time in nearly nine months.  This was a classic death cross signal.  Who wants to fade that?!

t-bond-t-note-spread-50-and-200-ma-daily

T-bond T-note spread (50-day and 200-day MA) daily

Trade Strategy:

T-bond/T-note Spread

The blog will make a hypothetical trade by shorting one March T-bond contract and simultaneously buying one March T-note contract if the spread closes below the 50-day Moving Average (currently at 27-01).  Initially, the spread will be liquidated on a two-consecutive day close 8/32nds (one-quarter of a point) above the 2017 high (currently at 28-00).

Bund/BOBL Spread: Roll With the Bear

Out With the Old, In With the New

The IMC blog entered a short position in the December Bund/BOBL spread at 31.81 on October 10th.  The December European treasury futures contracts are expiring soon, so it’s time to roll over into the March contracts.

We noted in September that the close below the rising 30-bar Moving Average on the nearest-futures weekly chart for the first time in a year could have marked the beginning of a multi-month decline.  That’s how it played out the last two times the spread cracked the weekly 30-bar MA.

euro-bund-euro-bobl-spread-nearest-futures-weekly

Euro Bund Euro BOBL spread (nearest-futures) weekly

Another bearish development occurred one month ago.  The Bund/BOBL spread closed back below the 2015 high of 30.58.  Remember the old charting rule: Old resistance, once broken, becomes new support.  Well, that support level gave out four weeks ago.  This confirms that the trend has indeed turned bearish.

Where To Now?

A Fibonacci .618 retracement of the move from the 2015 low to the 2016 high would take the spread down to 26.13.  That’s another three full points from here.

But that does not mean the decline has to stop at Fibonacci support.

If the current decline from the 2016 record high replicates the 9.40-point decline from last year’s record high, the Bund/BOBL spread would hit 24.74 before it’s all over.

The bottom line is that the spread continues to break layers of technical support and the next targeted support area is still a few full points away.  Therefore, it makes sense to simply roll the contracts over and stay short.

Heck, we may even be willing to add to the position if the right setup comes along!  We’ll keep you posted if we see something interesting.

Trade Strategy:

Exit the hypothetical short December Bund/BOBL spread and simultaneously enter a short March Bund/BOBL spread at the market-on-close on Wednesday, December 7th.  Initially, the spread will be liquidated on a two-consecutive day close above 34.30. 

Bund/BOBL spread: Shift to the December Contracts

Buying More Time

The IMC blog is working orders to short the September Bund/BOBL spread.  We’ve been doing this for months, actually.  The spread has continued to climb, so we have just patiently waited for a trend change to materialize before we throw our hat in the ring.

September treasury contracts are expiring soon.  Therefore, we need to recalibrate our short sale parameters and start stalking the December Bund/BOBL spread.

It appears that the December Bund/BOBL spread has found stiff resistance as soon as it crossed the 33.00 level.  This spread peaked at 33.24 on July 5th and backed off.  It then posted a new contract high of 33.41 on July 29th, but quickly retreated again.  Then the spread made it all the way back up to 33.36 just this past Friday.

December Euro Bund Euro BOBL spread daily

December Euro Bund Euro BOBL spread daily

On the one hand, the fact that the spread just can’t get past this barrier makes it tempting to short against.  On the other hand, the more a spread tests support/resistance, the more likely it is to eventually break it.  Therefore, we are inclined to wait for a break of support before we get short.

The December Bund/BOBL spread made its low for the month at 32.51 on August 2nd.  It got awfully close on August 16th when it dropped to 32.55, but the spread recovered again and went on to make new highs for the month.  Therefore, the IMC blog will consider a break of these similar lows a support breach worthy of an entry signal on the short side.

Weekly Confirmation

On the weekly timeframe, we’ve been monitoring the rising 30-bar Moving Average for support.  The spread has closed above the weekly 30-bar MA every week for a year straight now.  A close back below would signal a bearish trend change on this timeframe.

Recall what happened when the Bund/BOBL spread closed below the weekly 30-bar MA and triggered a bearish trend change in 2013 and 2015.  The decline continued for months afterwards.  We want to make sure we are swimming downstream with the tide when that happens again.

Euro Bund Euro BOBL spread weekly

Euro Bund Euro BOBL spread weekly

Coincidentally, the weekly 30-bar MA is currently located at 32.65.  When the December spread becomes the nearest trading month this week, then a break of the current August low will also put the Bund/BOBL spread below the weekly 30-bar MA.  This could create a one-two punch by way of a technical support break on two different timeframes.  It’s hard to get a better setup than that.

Trade Strategy:

Cancel the current hypothetical order to short the September Bund/BOBL spread and replace it with a new hypothetical order to sell one December Euro bund contract and simultaneously buy one December Euro BOBL contract if the spread closes below the current August low of 32.51.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 33.41). 

Bund/BOBL spread: Short Sale Parameter Revision

Trailing Along

For the last several months, the IMC blog has been stalking the Bund/BOBL spread for a short sale.  Basically, we’ve been trailing the spread with a contingency to get short on a break of a prior month’s low.

It hasn’t happened yet.

September Bund BOBL spread daily

September Bund BOBL spread daily

Trading for the month of July ended today.  The September Bund/BOBL spread finished with a new contract high.  A mid-month correction left an obvious price support area on the chart at the July low of 32.54.  Therefore, we are going to raise the short sale parameters to enter on a break of this correction low.

The Bund/BOBL spread is rocketing higher as negative interest rates in Europe continue to propel the treasury spreads.  Once the “rocket” runs out of fuel, though, a significant reversal is likely.

One way we may know that the fuel is gone is when the spread breaks below technical support on at least two timeframes.  The break of the mid-July low would do the trick on the daily timeframe.

On the weekly chart, the rising 30-bar Moving Average may be the trip switch to keep an eye on.  When the Bund/BOBL spread closed below the weekly 30-bar MA in 2013 and again in 2015, it continued to trend lower for months afterwards.

Bund BOBL spread weekly (30-bar MA)

Bund BOBL spread weekly (30-bar MA)

Therefore, a close below the weekly 30-bar MA for the first time since August of 2016 would confirm that a downtrend is in motion.  Once that happens, we will likely be positioned on the short side and looking to add.

Trade Strategy:

Cancel the current hypothetical order to short the Bund/BOBL spread and replace it with a new hypothetical order to sell one September Euro bund contract and simultaneously buy one September Euro BOBL contract if the spread closes below the July low of 32.54.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 34.26). 

US Treasuries: On the Sidelines

Gone Flat

The IMC blog initiated a short position in the September T-note/5-Year note spread at the equivalent of 9-12.5 on March 1st.  The spread was liquidated at 10-12.5 on June 13th.  This trade resulted in a loss of -$1,000.

T-note 5-year note spread daily (nearest-futures)

T-note 5-year note spread daily (nearest-futures)

On the nearest-futures chart, the T-note/5-Year note spread is less than one-quarter of a point shy of matching the multi-year high that was posted in February.  However, the September spread has closed well above it for the last four days in a row.  This puts it within striking distance of the 2012 top at 11-02.5.

Low Yield Contagion

The US interest rate spreads have continued to surge on safe-haven buying and ideas that the Fed will put off any further rate hikes in the near-term.  US economic data is not living up to expectations.

Furthermore, negative yields around the globe are spreading like a contagion.  Worries about next week’s Brexit vote have caused the 10-year Euro bund to hit a negative yield for the first time ever and the Swiss 30-year bond even went negative.

Seriously, who wants to lock in a negative rate –meaning that you are paying the government to borrow from you- for three decades?!  This is insane.

This is going on in Japan, too.  Their 10-year yield dropped to a new record in negative territory.

One of these days, people are going to pause and think about what they’re really buying when they purchase treasuries with negative interest rates.  When common sense starts trickling in, treasuries could experience a complete meltdown.  Therefore, spread traders should continue to monitor interest rate spreads for short sale opportunities.

US Treasuries: One Out and One Down

Knocked Out

The IMC blog initiated short positions in the US yield curve at the beginning of March.  Thanks to the weaker-than-expected jobs report last week, one of the liquidation parameters were elected.

A short September T-bond/T-note spread was entered at the equivalent 31-14 on March 1st and liquidated at 35-20 on June 3rd.  This resulted in a loss of -$4,187.50 per spread.

Also, a short September T-note/5-Year note spread was entered at the equivalent 9-12.5 on March 1st.  The exit criterion is to bail on a two-consecutive day close above 10-06.  This hasn’t happened yet, but it’s gotten awfully close.  The spread hit 10-05 just last week!

Stretched Thin

Despite the fact that the T-bond/T-note spread was liquidated, it remains on our radar screen for another potential short sale.  The September spread posted a new contract high and is now just a tick away from the 36-00 mark.  This puts it right on the doorstep of the 2015 top at 36-14 and the February 2016 peak at 36-10.

T-bond T-note spread daily (nearest-futures)

T-bond T-note spread daily (nearest-futures)

However, the nearest-futures spread hit a new high of 37-12 today.  This is a bullish event for the spread.  Because of this potential breakout, we’re going to hang back a bit and see if the breakout is sustainable or not before we post any reentry parameters.  A two-day close back under the February high of 35-11 in the September spread could do the trick.  If something interesting develops, we’ll certainly have more to say.

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.

Bund/BOBL spread: Trade in September

Getting More Time

We’re about at the halfway mark for the month, so traders will soon start rolling out of their June Treasury contracts and into the September deliveries.  Since we have not yet been elected on our contingency to short the June Bund/BOBL spread, we’ll go ahead and switch to working orders for the September spread. That way, we won’t have to worry about rolling the position until the end of summer.

You may recall that our parameter for getting short was to wait for a break below price support at the similar lows of mid-February and mid-March at 30.63 and 30.61, respectively.  This was confluent with the weekly 2015 high of 30.58.

Well, the spread got awfully close to that point in late April and then took off again.  This confirms that it is an important price level to monitor.

The September Bund/BOBL spread is trading at a discount of nearly two full points to the June spread, so it is a lot closer to the weekly 2015 high than the June spread is.  When it becomes the nearest-futures spread in a few weeks, the pressure will get turned up.  Either the September spread needs to take the baton from the bull market and run higher or else it could indicate that the run is over.

September Euro Bund Euro BOBL spread daily

September Euro Bund Euro BOBL spread daily

The March low of 28.66 and slightly higher April low of 28.81 set key support on the daily timeframe for the September Bund/BOBL spread.  Therefore, we will use a break of this level as a sell signal.

A test or breakout above the current contract high –especially after the September contracts become the front month contracts– could provide us with a setup to get short at higher prices.  A Wash & Rinse sell pattern would certainly be nice.  If so, we will definitely be posting something.  Until then, Schönes Wochenende!

Trade Strategy:

Cancel the hypothetical order to short the June Bund/BOBL spread.  Replace it with a hypothetical order to sell one September Euro bund contract and simultaneously buy one September Euro BOBL contract if the spread closes below 28.66.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 31.26).