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On the radar:

▪ The conventional wisdom isn’t always wisdom at all, don’t count out Treasuries.
The conventional wisdom isn’t always wisdom at all, don’t count out Treasuries.

Be Careful Following the Masses

The consensus on the street (both Wall and Main) is Treasuries are among the worst asset classes to park funds in the current environment. The overwhelming premise is obvious, the value of interest rate securities moves lower as interest rates increase and the Fed is in the trenches of liquidity tightening. Further, interest rates remain at historically low levels (at least in the middle and long end of the curves) and are assumed to have “nowhere to go but higher”. Accordingly, the masses are complacently bearish in the Treasury complex and in the futures market space most traders are holding net short positions. In fact, speculators in the 10-year note futures contract are currently shorter than they have ever been before!

Commitments of Traders Report

According to the Commitments of Traders Report (COT) issued by the CFTC (Commodity Futures Trading Commission), large speculators are holding a net short position of roughly 600,00 contracts. If you consider the small speculator holdings, speculators as a total are net short about 800,000 contracts. This is something we’ve never witnessed before.

The way we see it if most market participants have the same opinion and have already acted in the futures markets or in their investment portfolio allocation, selling in the Treasury complex should dry up. Further, those with speculative short positions in futures (or maybe the TLT) will eventually need to buy back their holdings to get flat the market. Regardless of fundamental arguments otherwise, the unwinding of this historically overcrowded trade could lead to the type of rally that makes the bears wish they had never heard of the practice of short selling.


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Seasonal Chart

I learned early in my career not to go against the late-summer/early-fall seasonal rally in Treasuries. In my experience, it is one of the more reliable seasonal patterns and has the potential to be the least forgiving for those caught in its wrath. Trust me on this; I once blew up my parent’s trading account trying to fight it (that was an unpleasant conversation).

The 10-year note futures contract tends to move higher overall during the second half of the year but most notably, it often moves sharply higher from July through early October. In this particular year, we suspect the seasonal move could be substantial given depressed Treasury prices going into the bullish season.

10-year seasonal chart

Putting Yields into Perspective

While we can’t argue that interest rates in Treasuries, and particularly the 10-year note are historically low under 3%, it is important to acknowledge where we have been.

10-year-yield-over-60 years

The reality is, yields are relatively “rich” when compared to comparable low risk securities issued by other governments. Also, a quick look at a chart of 10-year note yields during the previous five years reveals the reality that a 3% yield could be considered high. After all, we came from a sub-1.5% print in July 2016.


Weekly Chart

The yield on the 10-year note has tested 3% on multiple occasions but has consistently found resistance in that area. Similarly, the 10-year note futures market has experienced several probes lower in 2018 but each has been rejected; in our opinion, recent price action is indicative of a double-bottom. This is a technical analysis pattern in which buyers step in preventing prices from surpassing a noted support level. Double bottoms are often followed by significant trend reversals and we have a feeling this time will conform to the norm.


On a weekly chart, trend oscillators such as the RSI (Relative Strength Index) and Williams %R, have turned higher and appear to have room to extend the move. This should lead to a price increase into the 122’15 area for the 10-year note futures contract. If this level is breached, we see a run toward 128’0; this would be a substantial move leaving yields closer to 2%!

In conclusion, sometimes markets aren’t at all what they seem to be. Additionally, most market participants are incorrect in directional speculations. Thus, putting money to work in the same direction as the masses, particularly in a dramatically overcrowded trade such as the bearish Treasury idea, generally isn’t accompanied with a happy ending. Be careful, what seems like the unthinkable in the interest rate complex today could be lurking around the corner tomorrow; never assume conventional wisdom is actually wisdom.

*There is substantial risk of loss in trading futures and options.

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Seasonality is already factored into current prices, any references to such does not indicate future market action.

There is substantial risk of loss in trading futures and options.

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