Bond bull won’t go away

Forecasting the bond market is difficult, especially when a highly anticipated Federal Open Market Committee (FOMC) meeting lies between writing and publication. However, the possible setup provides an excellent example of commercial trader behavior.

Commercial traders set a net record short last summer as the September 2016 contract reached an all-time high above 177. That contract dropped 6%, to 166 at expiration. The December 2016 contract, which includes the first full retracement from the July 2016 high, peaked at 175-16 before falling more than 14% by expiration that December. We’ve been watching the commercial traders’ behavior on this decline, and they feel pretty confident that the next move is higher. Rather than exiting the market outright, they’ve reversed to long December 2017 contracts. The December 2017 futures contract has held up well, falling about 4% from the July 2016 high. While the FOMC has begun its long-awaited tightening cycle, the commercial traders are suggesting the long bond could test the July 2016 high.

The support in December futures provided by commercial purchases has caused the market to develop a bull flag formation on the weekly chart. A close above 173-12 should push December 2017 bonds toward their contract high and an implied yield around 1.506%. This is the rally and test we’ve been waiting for prior to finally establishing a short.

Sugar  Bottom
World sugar could be making a bottom. The sugar market bottomed nearly two years ago at 12.27¢ per pound. Sugar producers tend to control the sugar market. This can be seen in their consistently negative net position. It is easy to see that a bullish commercial trader’s net position can simply show up as less negative on the chart. Their current position of short 55K sugar contracts still leaves room to grow as their position does drift to the positive side from time to time. Therefore, the commercial traders’ purchases combined with an improving fundamental picture suggest that the September 2015 low may hold and that the recently dramatic decline in the October 2017 futures contract is just washing out the speculative long position before setting up another run higher. It’s been nearly two years since the commercial traders’ net position was this bullish and they’ve still got another 300K contracts to grow their total position to record size.

Finally, soybeans and bean meal have fallen more than 15% from their spring high, far enough to attract processor buying. The recent acceleration of their decline has put the $8.50 to $9.00 per bushel support level in play and processors are behaving as if it will hold. They’re currently holding a record net long of 130K. However, they may be nearly done buying. If so, November beans will fall faster than December bean meal.