Treasury Demand Pushes US 5-Y Note Yields to Two-Month Lows; Price Action Breakout

by on May 20, 2014 7:44 am BST

Demand for US treasuries continue, and the 5-year treasury note broke through the yearlong downtrend created on May 22, 2013. Traders pushed yields to two-month lows as positions for higher yields are quelled ahead of the FOMC minutes this Wednesday.

The spread between the 5-year note and 30-year bond widened by five bps, the largest steepening in the yield curve since May 8. Hedge funds and other large speculators have seen their large net-short positions bow from bullish pressure. The 5-year note has gained 1.9 percent in 2014. “A lot of people have been burned in the rally and that has left many investors too nervous to make any negative bet on Treasuries,” said Jason Rogan, managing director of US government trading at Guggenhiem Securities. 

With questions still regarding the US economic outlook, and the outlook globally, as well as the overly dovish Federal Reserve, US treasury yields are still likely to print lower in the months to come. The 5-year note yield dropped to 1.55 percent. Thomas Simons, a primary dealer at Jefferies LLC, said “there is no good reason to get short, even at these levels, as Treasuries look very attractive relative to global debt.”

On the daily chart, the 5-year note futures broke through the yearly downtrend before meeting some resistance at the 200 EMA. If these levels hold, futures contracts could retest that ascending support level at 119’300, while a deeper retracement will find support at 119’190. Although, US treasuries are still receiving a lot of demand as equities trade to and from all-time highs.

A breakout of the 200 EMA will leave room to hit 120’210 before seeing the next level of significant resistance at 121’020.

1D Chart of ZF

1D Chart of ZF