US10Y – Hitting 125.0 for the first time in 2 years

Daily Chart

There have been renewed speculation that the Fed would execute tapering action in September. Whether this speculation has any merit is debatable, but the impact on US Treasuries is clear for all to see. The price of 10Y Benchmark T-Note has fallen significantly recently, from above 127.0 to current 125.0 in less than a week. This is also the first time the psychological important 125 round figure has been tagged since July 2011, and slightly lower than July’s swing low of 125.15, rather impressive considering that current sell-off is basically running by the rumor mill.

Given that FOMC September decision is still anybody’s guess, there is every chance that Fed may choose not to taper then. If that is the case, we can expect a return in Treasury demand which will drive price up significantly higher, especially since the tapering scenario may have already been fully priced in. Conversely, if 125.0 continue to hold, an announcement of taper may fail to drive additional bearish impetus as bears may have already saturated themselves with short-positions, and hence unable to sell even more. Upside risk for bond prices is higher than that of downside risks as a result of this.

From a technical perspective, Stoch readings are currently deeply oversold, making the 125.0 break that much harder especially since there is no actual fundamental driver to push price lower. As such, a rebound off 125.0 may still be possible in the near future, and assuming that tapering does not happen in September, we could easily see the downward trendline broken together with Stoch lines crossing 20.0 for a bullish cycle signal. This would open up 127.0 – 128.0 as bullish target in the short-term post September.

Long-term bias for Treasuries is still down, as Fed is expected to taper eventually, if not 2013 then 2014. As such, do not simply expect price to rally indefinitely from 127.0 to higher pastures, as there will be further bears intending to play a future tapering scenario.

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