Sunday, December 27, 2009

US Treas Bond and Crude Calendar Spreads

I don't often look at the T- Bond but the following piece from Zero Hedge.com grabbed my interest. 
Brace For Impact: In 2010, Demand For US Fixed Income Has To Increase Elevenfold... Or Else
".... Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that....
Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating  demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck."

Take a look at the 30 year charts:          
                                                                        

click tp enlarge


I once heard a presentation by a famous old commodity technician and CTA named David Johnson in which he called for a long term multi decade rally in the bond market based on a reverse Head and Shoulders pattern. That was 1983, so I have a tendency to give that pattern credibility in T Bonds.

Another story caught my attention this weekend, from Bloomberg,
Treasury Yield Curve Steepens to Record on Debt Demand Concern
 "The U.S. will sell $44 billion in two-year notes on Dec. 28, $42 billion in five-year debt the next day and $32 billion in seven-year securities on Dec. 30. The five-year sale and seven-year offering equal the all-time highest issues of the securities set last month."

Now take another look at those charts.

What does this have to do with crude?  Well it's likely that rising rates are accompanied by a stronger USD.
And it's doubtful that the equities markets like it. Of course if equities collapse T Bonds might still avoid a dump.  Demand for crude will be constrained in either scenario. Additionally one of the trades providing spot crude support , the contango trade, will likely cost more.                             
                                                            12 mo. Crude Calendar Spread



                                                                         click to enlarge




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