Unrest Boosts Bonds

Today’s Idea

Bond fundamentals have quickly turned. Equities suffered their first two-day decline in months, and the unrest in North Africa and the Middle East has many traders thinking defensively rather than offensively, putting a premium on safe haven investments. Technically, the June futures contract is coming up on a very important resistance level. Some traders may wish to enter into a June Bond contract on a close above 120-16, with an upside target of 123-16 and a protective stop at 119-00. The trade risks roughly $1,500 and has a possible maximum profit of $3,000.

Fundamentals

The tumultuous political situations in North Africa and the Middle East have many equity traders on edge. Equity prices suffered their second day of heavy losses in a row yesterday, amid the turmoil. Many traders are now heading to higher ground and have been searching for safer investments in the form of Gold and Bonds. Bond prices have been on the slide since October due to rosier economic outlooks and concern that central banks around the globe may have a difficult time staving-off inflation in the not too distant future. In addition to profit-taking in the form of short-covering, the unrest has provided a much needed reprieve for Bond bulls. There are concerns that further unrest in the region could slow economic activity, thus curbing inflation without central bank intervention. This may be a very short-sighted view in light of the fact that the region produces much of the world’s petroleum. Initially, traders had thought that the unrest was isolated to Tunisia and Egypt, but recent events have proven this assessment to be incorrect. There is genuine concern over whether Saudi Arabia’s regime can maintain its hold of government, and the Saud family is attempting to quell unrest by increasing government aid and spending. If some semblance of stability materializes, Bond fundamentals once again look bearish, whereas enduring turmoil may continue to support treasury prices.

Technical Notes

Turning to the chart, we see the June Bond contract coming up to test resistance at the 120-16 level. This can be viewed as a tough test for Bonds, as the level was tested repeatedly in December and January without a bullish breakout. A breakout above 120-16 suggests prices could test resistance at the 123-16 level. Failure to take-out the upper end of the price band suggests sideways trading between 117-16 and 123-16.

Rob Kurzatkowski, Senior Commodity Analyst

Read the DailyMarkets.com review of OptionsXpress

You may be interested in the following articles: American home bank implements turning point technology.