US10Y Technicals – QE Taper Bigger Scare Than Threat Of War

US10Y T-note prices fell sharply yesterday after a much stronger than expected ISM Manufacturing Print. August numbers came in at 55.7, much higher than the expected 54.0 and reflecting a much stronger growth rate compared to July’s 55.4. Unfortunately for bond traders, this strongest print in 28 months actually heightened market fears of a QE taper, resulting in yields increasing/bond prices decreasing. Prices retraced a large part of the gains following reports that Obama is receiving support from Republican leaders, bringing us closer to a Syrian war. The fear factor resulted in a stronger demand in treasuries, sending 10Y prices back up almost immediately following the initial sell-off on Taper fears.

Hourly Chart

However, the rally was nowhere close to make up for the losses suffered earlier. Prices failed to even hold onto the 124.8 support turned resistance, trading lower by straddling the underside of the descending trendline towards the end of US trade which continued into the Asian session. Stochastic readings suggest that we are in a downtrend, with readings pointing lower, looking to extend the original bearish cycle signal that was in given yesterday. Based on this, the immediate bearish target would be the swing low of yesterday, but bears may be able to aim further and extend current bearish momentum that has been in play since 28th August.

Weekly Chart

From the long-term chart we can see a potential bearish breakout in the works. If the breakout is confirmed, the next bearish target would be 122.75 – 123.0, with ultimate bearish target the consolidation between 118.0 – 122.0 found between Jan to April 2011.

Fundamentally, it is interesting to see that markets is still having fears of an upcoming QE taper, despite it being more or less a done deal. With prices falling so sharply following the ISM Manufacturing number, it seems that market has not fully priced in a tapering scenario in September. Therefore if a tapering action is announced, we could still see prices dipping lower substantially. However, the reverse is true as well – noting how jittery market is with regards to a tapering action, a lack thereof during September’s FOMC meeting may drive Treasury prices sharply higher.

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