For the 10-year Treasury yield, it's been a May to remember.
Over the course of three weeks, the 10-year yield have risen from 1.65 percent to 2.15 percent. Although not unprecedented, this type of movement is rare. It's important to remember the causes of the move before we take a shot at trading it.
The surge in yield began when the market began to consider the possibility of the Federal Reserve ending quantitative easing. The velocity of the move, however, was probably caused by a realization that an overwhelming number of positions were not adequately hedged. Most of the selling that we've seen in futures markets appears to be rushed, as many come to grips with the possibility of considerably higher rates.
That being said, markets do tend to be panic-driven, and often overshoot reasonable targets in the short-term. Although I do believe that a 2.40 percent yield is the medium-term target, there is the potential for a quick move back down to 2.06 percent yields.
For that reason, I am interested in buying the September 10-Year Treasury Note contract at current level of 129'11, with a short-term target of 130'01. On the downside, 128'18 is a reasonable stop-out level.
I should add, however, that this is a counter-trend trade, and a move to the objective level of 130'01 or the stop out level of 128'18 would probably flip me to a negative bias. After all, if we see 128'18, it will show that I have underestimated the power of the underlying move.
—Jim Iuorio is Managing Director of TJM Institutional Services. Follow him on Twitter @JimIuorio.
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