The rally in T-notes and T-bonds has been one of the biggest surprises of the summer. Prices have risen (and yields fallen) despite an American economy that has been gathering momentum. The US economy may not be setting any new world speed record for growth, but it is firming. Housing rebounded in July, surprising analysts who expected a repeat of this spring’s sluggishness. Employment continues to improve as well.

We believe the release of the Fed minutes earlier this week along with Janet Yellen’s statements from Jackson Hole earlier today are just the beginning of a campaign to prepare the public for a hawkish shift in Monetary Policy. Bonds and notes haven’t played along yet. Why? The answer lies in Europe. ECB President, Mario Draghi’s campaign to save the sovereign debt market is working too well.

Yields across Europe have fallen (and bond prices risen) to levels inconceivable just a year ago – making the American sovereign debt market look like a “good deal” in comparison. 10-year German bunds now yield less than 1 percent which is 142 basis points or 1.42% less than their American counterparts.  French 10-year bonds yield 1.32% — roughly 80 basis points lower than US 10-year notes. This is France for Pete’s sake! No wonder US government debt looks like such a good deal, all else being equal.

The problem is all else is not equal…

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The American economy is far stronger than that of its European cousin. This strength could eventually provide the Fed with a ready excuse to change course. Yellen and Company have be warning as much all week. If you believe, as we do, that bond prices (and yields) have gotten too far ahead of themselves, this could be the perfect time to establish a low-risk short position.

We are recommending our trading clients take a look at purchasing December put options in both T-bonds and T-notes. In T-bonds we are looking at a standalone put that is currently offered at $750 and has the potential to be worth at least $5,000 should the December futures contract hit our 130-00 objective prior to option expiration in late November. 

U.S. 30-year bonds and 10-year notes are overbought and overextended.  (See chart above.) Bond futures have retraced a Fibonacci-perfect 61.8% of their recent down move, testing the long-term downtrend line in the process. A pair of consecutively higher Friday closes over the recent high of 141-21 would negate this downtrend.  That’s why we suggest using it as a risk point and would recommending using it as a signal to exit our positions and cut losses should it occur.

Put plays in 10-year T-notes can be established for much less. Reasonable profit potential may be lower as well.  Prices can and do change so check with your personal RMB Group broker for the latest.

If you don’t have an RMB Group account and would like to know more about this play please feel free to give us a call at 800-345-7026 toll free or 312-373-4970 direct. You can also email or visit us one line at