Buy US 10 Year Note As Investors Flock To US In Negative Yield Environment

The 10-year US T-Note remained supported in trading on Wednesday (27/7), as investors looked for a safe shelter ahead of the Fed’s statement at the end of the FOMC meeting, later today.

On Tuesday (26/7), markets continued to receive stronger-than-expected economic reports from U.S. In a report from the Conference Board, the consumer confidence index came in at 97.3 in July, topping analyst expectations of 95.9. This underlined U.S consumer optimism over current business and labor market conditions, suggesting that the economy will continue to grow at a moderate pace.  Additionally, data from the Commerce Department said that new home sales jumped by 3.5% to a seven-year high of 592,000 in June. The data exceeded the 560,000 forecast by economists. A strong report signals sturdy demand in the housing market on the back of growing confidence in the economy. The Federal Reserve Bank of Richmond manufacturing index unexpectedly edged up to 10 in July, from -7 in the preceding month.

The Fed started its two-day meeting Tuesday and is scheduled to release its latest policy statement on Wednesday afternoon. Analysts expect that stronger economic data recently, and a potential rise in wage inflation may prompt the Federal Reserve to consider taking action sooner rather than later. However, some investors still anticipate the U.S central bank to leave its target range on policy rates at 0.25% – 0.5% due to turbulence in global markets, especially the historic “Brexit”. According to the CME group, interest rate futures, a common instrument for investors and traders to place trades on the Fed’s policy outlook, imply that investors assign a probability of 20% to a rate hike by the September meeting.

On the other hand, the U.S 10-year T-note encountered strong demand from investors overseas who have been struggling to generate income amid negative-yielding government bonds in Japan and Europe. The 5-year Japanese government bond (JGB) yield fell to a fresh low of -0.383% in recent trade, reacting to the news that Shinzo Abe’s government is planning to compile a stimulus package of more than $265 billion in attempt to bolster economic growth.

Markets are paying close attention to the Fed’s statement later tonight for any hints of tightening. The bank of Japan’s rate decision, which is due on Friday (29/7) is in the spotlight as well, given the recent moves in the Japanese Markets including the Yen, The Nikkei Stock Index as well as JGB’s.


Fig. U.S 10-year T-note D1 Technical Chart

On the daily chart, the price is moving in a narrow range ahead of the Fed. The parabolic SAR is still casting a shadow over the price action, showing that the bearish trend still hovers in the air. Yet, RSI (14) has started to rally and is currently up to the level of 45.03, after nearly slipping into oversold territory. The level 38.2% of Fibonacci retracement is providing solid support. Therefore the market is expected to bounce back from here.

Trade suggestion

Buy limit at 131.80, Take profit at 132.18, Stop loss at 131.69

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