The current collapse in 10-year Treasury notes and the accompanying explosion in yields is breathtaking. We’ve been trading futures and options since 1984. We cannot remember seeing anything like this in what is typically a very staid market. T-note futures took out lows going back to 2011 last night, extending the free fall that began just two months ago. They’ve recovered smartly as we write this and are exhibiting signs of a classic capitulation.
Data Source: Reuters/Datastream
RMB Group trading customers know that we’ve been very bearish on T-notes for the past year. We believe it’s time to reverse bias – a least temporarily. It’s not just the price action of Treasury futures that has us spooked; it’s also what some key commodities are telling us. Gold, silver and even former metal market darling, palladium, are falling. Russia dominates the palladium market, producing roughly 40% of total global output. One would assume that the war would extremely bullish for palladium. It is clearly not. Something is going on.
Gold and silver are classic inflation hedges, yet both have performed poorly in the current inflationary environment. Dr. Copper is rolling over as well. Could these markets be anticipating a slowdown or perhaps even a recession caused in part by raging inflation? Or are they pricing in better inflation numbers down the road due to simple math? Future inflation readings will be derived from a higher price base, thereby reducing the reported percentage gains. What they do not seem to be anticipating is even more inflation.
Data Source: Reuters/Datastream
“The Cure for High Prices is High Prices”
This old grain traders’ adage applies. Higher prices eventually curtail consumption. Add a plummeting stock market to the mix and the economic brakes start smoking. The only commodity sector that hasn’t shown weakness is energy. We suspect it will soon, embargo or no embargo. Americans love to drive, but at $5.00 per gallon, we suspect they won’t be driving as far.
There is the also yield on Treasuries themselves. How long will it be before the current 3% plus yield in 10-year Treasuries starts to become attractive to stock market investors who are giving up 1 to 3 percent per day during the current selloff? We believe that time will soon be upon us and expect a big upside correction in Treasury prices and a corresponding downside correction in Treasury yields soon.
Use Call Spreads to Make a Contrarian Play in T-notes
RMB trading customers may want to consider buying August 120-00 T-note futures call options while simultaneously selling an equal number of August 123-00 T-note call options for a net cost of $500 or less, looking for T-note futures to bounce to our upside target of 123-00 in the September futures contract prior to option expiration on July 22.
Your maximum risk is the amount you pay for your spreads plus transaction costs. These spreads have the potential to be worth as much as $3,000. Exit your position if and when are 123-00 price target is hit.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping our clientele trade futures and options since 1991. RMB Group brokers are familiar with the option strategies described in this report. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com. Want to know more about trading futures and options? Download our FREE Report, the RMB Group “Short Course in Futures and Options.”
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The RMB Group
222 South Riverside Plaza, Suite 1200, Chicago, IL 60606
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