Bond futures have suffered several consecutive days of setbacks due to stronger equity prices and a weaker US Dollar. Many are looking at the activity and beginning to question whether the Bond market will pull back from its current lofty levels. Equity traders likely have had their blinders on in recent sessions, focused on the strong retail data from the holiday kickoff last weekend, improved consumer sentiment, and promising job data from ADP.
However, the focus on these positives may only last so long, as Europe could tailspin out of control. Some firms are already bracing for the possibility of a collapse in the pan-European currency, the Euro, and the ratings agencies have unleashed a new wave of bank downgrades. China's move in decreasing reserve requirements by banks was viewed by many as a positive for equity prices. However, given the conservative nature of the Chinese government, the move could be seen as a possible harbinger of bad things to come. There are already rumblings that the Asian giant may have its own mini housing crisis on the horizon, which could adversely affect both their domestic and global economies.
Common sense would tell one that Bonds are overpriced at these levels in normal times, but these are not normal times. Several key markets hit their relative support and resistance levels, most notably the Euro, Dollar Index, and several major equity indexes, which may account for the "exuberance" the market has seen in recent sessions. These markets simply may not have been ready to break out just yet, and some of the recent market activity can likely be viewed as position covering. In the near-term, Bonds may continue to be one of, if not the main defensive plays for traders. This is contingent on how the currency markets behave. If the Euro begins to falter once again, Bonds may be a more sought after investment vehicle over Gold.
Technical Notes
Turning to the chart, we see the March Bond contract nearing a near-term support level at the 140-00 mark. Failure to hold 140 could result in a test of the support at 135-00, which can be seen as critical. There is not much support between 127-00 and 135-00, suggesting that a failure to hold 135-00 could bring about a violent sell-off. This would also confirm a large double-top pattern on the daily chart. The RSI has come off overbought levels, which in addition to the failed test of 145 to the upside, may have contributed to the recent wave of selling pressure.
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