DJ Debt Futures Review: Up On Data, Unwinding Of Tsy-Bund Trade
By Allen Sykora
BEND, Ore. (Dow Jones)--Reduced worries about inflation and a decline in
October building permits enabled interest-rate futures in Chicago to work
their way higher Wednesday.
The rise continued when a large account reportedly unwound a trade in
which it had been short in Treasuries and long in German bunds, analysts said.
The gains in interest-rate futures accelerated when buy stops were
triggered, traders and analysts said. Much of the buying was characterized as
short covering.
Dec 10-year notes settled up 15.5 ticks at 112-25.5, Dec Treasury bonds
gained 26 ticks to 113-09, and Jun Eurodollars rose 7.5 basis points to 96.96.
"On the fundamental side of things, the core inflation was benign," said
Craig Ross, president of ApexFutures.com.
The government reported first thing Wednesday morning that the core
Consumer Price Index for October rose just 0.2%, although this was slightly
above the consensus forecast of a 0.1% gain. Overall CPI of 0.6% was likewise
above the consensus outlook of a 0.4% increase, but nevertheless was nowhere
near as startling as Tuesday's 1.7% jump in the October Producer Price Index.
The data "gave us a little bit of comfort that inflation is not out of
hand," said Ross.
Meanwhile, he said, while housing starts rose a larger-than-forecast
2.027 annualized units in October, building permits decreased by 0.7% to a
1.984 million annual rate. This was slightly below the 2.0 million estimate.
The permits are significant since it is a sign of what may happen in the
housing sector going forward, said Ross.
While the market started to uptick after the early morning data, more
strength came late in the morning, said Roseanne Briggen, senior-market
analyst with Informa Global Markets.
"A huge bund-versus-Treasury trade was unwound," she said. "The account
was short Treasuries and long bunds. The reversal of that trade caused buying
in Treasuries and selling in bunds.
"That triggered technical buying and short covering."
Prior to this, said Briggen, some traders had doubts about whether the
early-morning gains would last, thus had used the rally as a selling
opportunity.
"They set new shorts, but the bid never really seemed to fade," she
continued. "That was a function of deal pricings all afternoon. The corporate
calendar was huge today - about $12 billion. As those deals were priced, the
rate lock gets unwound, which causes Treasury buying."
Thus, continued Briggen, shorts were eventually forced to exit their
positions, providing yet more buying fuel.
"They threw in the towel, and we've been grinding higher all afternoon,"
she said.
As for the technicals, Ross reported that buy stops were triggered in
the Dec 30-year Treasury bonds as they moved up through Tuesday's open-outcry
high of 112-25, which now turns into support. Bonds peaked at 113-14. The
next chart resistance, Ross said, can be expected around 113-19 and 113-30.
In Dec 10-year notes, buy stops were hit around 112-20, enabling the
market to get as high as 112-28.5. The next resistance is seen up at 113-07.5.
While Eurodollars fell, the Jun contract did initially test support at
Tuesday's several-month lows, which were 96.84 in screen trading and 96.845
in pit trading. They held at 96.85.
But while they also turned higher, they remained below resistance at
96.98 and 97.015, said Ross. Thus, in the short end of the curve, "the party
may not be over for the bears yet," he added.
Nearby support now lies at failed resistance at Tuesday's 96.92 open-
outcry high, said Ross.
The market will get several more economic reports to digest on Thursday.
They include:
-- first-time weekly jobless claims at 0730 CT (1330 GMT), with the
forecasts calling for a fall of 1,000 to a rise of 2,000 from the previous
week's figure of 333,000;
-- leading economic indicators at 0900 CT (1500 GMT), with expectations
for a 0.1% dip in October; and
-- the Philadelphia Fed's business survey at 1100 CT (1700 GMT).
Expectations are for a reading of 23.5, which would be down from 28.5 in
October.
-By Allen Sykora; Dow Jones Newswires; 541-318-8765;
[email protected]
(END) Dow Jones Newswires
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