Commercials at an 8-Year Bullish Extreme on the 5-Year Note
Chart 1 below measures investor sentiment according to the intermediate to long term investment time horizone of Commercial Hedgers in the CBOT 5-Year Note contract via the latest Commitments of Traders data from the Commodity Futures Trading Commission (CFTC), which is plotted weekly since 2005 by the red line in the upper panel. Commercials use the futures market to hedge, and sometimes to enhance, their physical holdings in an asset.
The green ellipse in the upper right edge of the chart shows that professional investors are net long 191,692 contracts according to the latest data, which represents a minor retraction from a multi-year net bullish extreme of 300,000 contracts by the smart money. The green vertical highlights between both panels show that similar, and sometimes less severe, net long extremes have closely coincided with most of the important bottoms in the CBOT 5-Year Note contract since 2005, most recently in September 2013.
[Hear More: John Kosar: Divergences Within the Dow, But No Bear Market on the Horizon]
These data represent an aggressive bet by the smart money that the 5-Year is undervalued again, now, and likely to move significantly higher over the next one to several quarters.
Recent Underperformance By U.S. vs. European Govt. Bond Prices
Chart 2 below plots the daily relative performance of the CBOT T-Bond versus the Euro Bund since 2009 in the upper panel (prices not yields, blue line), quarterly overbought and oversold extremes by the T-Bond versus the Euro Bund in the middle panel (red line), and a corresponding daily chart of the T-Bond contract in the lower panel.
The green vertical highlights between all 3 panels show that quarterly oversold extremes by U.S. versus European government bond prices have either coincided with or led literally every one to several quarter rise the the T-Bond contract during this 5-year period.
The yellow-highlighted green ellipse at the right edge of the chart shows that the T-Bond is just starting to rebound from another such relative oversold extreme now, which suggests that another similarlyimportant bottom is emerging in long dated U.S. Treasury prices.
Flattening U.S. 2-year/10-year Yield Curve
Chart 3 below shows that the US 2s/10s Curve has not only flattened below its 200-day moving average (orange line, major trend proxy) since mid March, but also that the 50-day MA (blue line) is close to crossing below the 50-day which, should this occur, would indicate a major shift in momentum towards more upcoming flattening.
Even though this recent flattening in the curve has been attributable to a rise in the 2-year rather than a decline in the 10-year, the 2s/10s Curve has maintained a tight and stable positive correlation to the yield of the 10-Year at various intervals since August 2008. So, unless this almost-6-year relationship changes overnight, further flattening in the curve would be expected to coincide with a decline in 10-year yields as long dated U.S. Treasury prices rise.
Bearish Extreme In Treasuries By Professional Trend Followers
Chart 4 below plots the CBOT 10-Year Treasury Note daily since 2003 in the upper panel, with a daily survey of the collective bullishness of brokerage and advisory firms and commodity funds on the 10-Year Note via the Market Vane Survey, which is plotted by the blue line in the lower panel.
The yellow-highlighted green ellipse in the lower right edge of the chart show that these more intermediate to long term oriented professional trend followers are currently becoming more collectively bullish, from a late December least bullish extreme of less than 43% bullish that had previously coincided with what have arguably been the most important bottoms in the 10-Year Note during the past decade.
This is another completely different metric that also suggests that long term U.S. interest rates’ next significant trend is more likely to be lower, not higher.
Weakening Japanese Equities
Chart 5 below plots the Nikkei 255 daily since early 2013 and points out that the Japanese index resumed its larger 2013 advance last September following several months of sideways indecision by investors. However, the Nikkei has since slumped as of January and is now edging below major support at its 14,509 200-day moving average. Another 6% decline in the index from here, below the 13,540 midpoint of last year’s congestion area, would confirm a major bearish trend change and portend even more weakness in the months ahead.
Considering the 20-year positive correlation between the Nikkei 225 and the yield of the U.S. 10-Year Treasury Note, most recently 79% since January, continued weakness from here in Japanese equities would be seen as being indirectly positive for long dated U.S. Treasury prices.
To request the full report, and/or to get further information about Asbury Research including services and pricing, please email sales @ asburyresearch.com (remove space before and after the @ symbol) and include your full contact information.
