The US interest rate markets have seen their prices decline and yields rise since the Brexit near the end of June. In fact, both the Eurodollar and 5-year Treasury Note futures peaked following the vote on June 24th while the 10-year Treasury Notes and 30-year Treasury Bonds both peaked in early July. We initially tipped TraderPlanet’s readers off to the increasingly bearish situation leading up to the vote on June 20th in, Wicked Reversal: Clue to Short Bond Futures. Today, we’ll discuss the commercial traders’ short covering now that the market has fallen far enough to attract their attention ahead of next month’s election.

The fall in interest rate prices and the corresponding rise in yields can be attributed to any number and combination of factors. Identifying, quantifying and forecasting these factors is beyond the scope of my intelligence. As a trader, I need to focus less on the noise of the backstory, and more on the participants’ actions of the markets we’re trading. This is how trading signals are generated. It isn’t about getting the story right. It’s about increasing the account the balance. Now, let’s look at the quantitative data.

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Commercial traders have been net buyers in all but two weeks since the market began to fall through the near-term support at 168^16. The 30yr T-Bonds have declined by 7.5% in price since September 30th. This decline has brought the 30yr T-Bond below the support we’ve been watching closely at 164^16.  The next major support lies near 158^00. Commercial traders have nearly covered the full short position they implemented near the June/July highs. The commercial trader buying clearly paints the picture of a short trap, as speculators have been the only net sellers at and below the current support. Regardless of the economic politics of the next President, we think there’s a good long trade to be had pre-election.

Moving down the duration ladder, we come to the 10-year T-Notes. Commercial traders have bought about 185k contracts since establishing their post-Brexit short position. This has pushed their net position into positive territory but still leaves room for more commercial purchases. After all, they were net long more than 200k contracts in early June heading into the Brexit vote. We believe their buying will continue which makes the current support between 128^00 and 129^22 that much more substantial.

Focusing on the shorter duration 5-year Treasury Notes and finally, the Eurodollar futures shows just how bullish the commercial traders are on the short end of the yield curve. The commercial trader net position never went negative in either of these markets through the Brexit fallout. Furthermore, the commercial traders are near their net long position records in both of these markets. While we didn’t have the chart space, each of the last three times, the commercial traders net long position exceeded 300k contracts the 5yr T-Notes put on a new leg higher. We expect this to continue.

Finally, the Eurodollar may be the most dramatic action we’ve seen. The commercial traders had paired their position down to about 300k contracts by July 1st as they took profits on the massive long position they carried into the vote. Since July 1st, they’ve r-purchased most of their long position as it has swelled to more than 2,000,000 in less than three months. We see this as a passionate defense of the support near 99.00. All in all, the vast amount of commercial buying in the interest rate sector makes this decline one to be bought.

Please see CotSignals for more information on how we use the Commitment of Traders report to generate actual trading signals, rather than stories.