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Technical Update: US Treasuries World’s Last Safe Haven?

  • Written by Syndicated Publisher 48 Comments48 Comments Comments
    November 24, 2011

    One man’s junk is apparently another man’s treasure. Bond markets across the globe are in selloff mode yet the US Treasury sets record after record with auctions across the yield curve this week.

    Regardless of how horrible the US fiscal house is USTs are deemed “risk free assets” and thus the flight to the USD and the UST. At some point the US will have to defend their own bond market but for now the risk off trade is long US Treasuries.

    Think of what I just said. Global bond markets are selling off yet the US is setting bullish records. If people are buying treasuries don’t they also need to buy US dollars? If the USD is strong doesn’t that mean equities are weak?

    Treasuries look very bullish in terms of price, bearish in terms of yield and from the daily charts below clearly this trade has more room to go.

    10 Year Daily Yield

    30 Year Daily Yield

    How to be positioned here comes down to one simple question. Is this current market selloff purely technical driven after the massive October 4 move or a global liquidation of risk assets? If you believe the former then technicals say this market is oversold, due for a bounce and has removed all weak hands which would set up a nice base to build a year end rally.

    If you believe the latter then this market will stay irrational and oversold far longer than most expect. Case in point on August 2, 2011 the SPX daily RSI was at 10 while the MACD was very negative. A similar setup is found on today’s SPX daily chart. Over the next five trading days the SPX would sell off 153 handles further. Anyone not willing to hold onto a trade would have missed the vast majority of the move.

    The market swings over the past four months, primarily October into November have really messed with trader’s minds. Bounces are expected while profits come and go like the wind. With the holiday shortened week in the US the question above is one that many should ponder. Personally I believe it is a global liquidation.

    A Few Technical Notes

    The currencies put in some major moves this entire week, primarily today. The AUD and EUR both took out support levels and other than a possible oversold bounce could see a rapid decline. The USD after doing little the past few days finally began breaking out today and is poised for a test of the $79.84 area which then could set up a quick move to the high 80′s.

    Divergences within equities are beginning to grow. The Russell 2000 (RUT) today was weak by 120 basis points (1.2%) all day while the Mid Cap 400 (MID) was weak by 70 bp. The RUT, MID and SPX all took out flag patterns on a closing basis (a bearish move).

    Nasty selloff into the close which makes sense with US markets closed Thursday and EU and Asia open risk off into the close was in order.

    The vix continues to seem rather suspect but in the context of the narrowing wedge it currently finds itself within price action seems normal. A breakout either way will come shortly. Additionally with the added holidays if memory serves that affects the vix calculation which is based on calendar days not just trading days.

    Jefferies (JEF) is rumored to be seeking a deal this weekend. If they don’t find a buyer which is highly probable they do not, confidence will further be shaken and counterparty risk ratcheted higher. Why would someone buy JEF now when they could do what Barclays did with Lehman and buy it on the cheap in bankruptcy.

    Bottom Line

    Lots of technical damage was done today but probably the big question is why did markets move down so fast last evening? Other than a possible early release of weak China PMI data the move lower was impressive in both the ES and AUD. Price action like that shows just how vulnerable this market is to the downside.

    For all those US based readers enjoy your Thanksgiving and rest up for an abbreviated session on Friday and then what will most likely be an extremely volatile trading week ahead. As always thanks for reading.

    Images: Flickr (licence attribution)

    About the Author

    Macro Story is designed as a one stop source for all of your macro related news and data.  From credit markets to economic data to geopolitics, you will find it all in a simple and organized fashion.  Content is presented in a format that allows you to read as little or as much as prefered.  Whether your goal is to do advanced research, a simple market overview or to become educated on macro subjects, the site has been designed with you in mind.
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