Not only is the longer-term outlook for US government bonds deeply unpromising, I believe they could also do badly in the weeks and months ahead. The reason for this is that America's Federal Reserve has embarked upon a third round of quantitative easing (QE). During the first two instalments of QE, the US 10-year notes suffered losses of 5.8 and 4.4 per cent, respectively.
The Federal Reserve is not alone in carrying out money-printing operations right now. The European Central Bank and the Bank of Japan are playing the game, too. This concerted monetary onslaught is likely to see investors flock to risky assets like equities and commodities, and towards riskier currencies, at the expense of 'safe' bonds, especially those denominated in the 'safe' US dollar.
I am not suggesting that the crisis of debt is anything like over, either in the US or especially in Europe. As the present round of monetary stimulus wears off in due course, investors are likely to focus once again on the deep-rooted problems of inadequate economic growth and excessive indebtedness. In that environment, a further flight to US 10-year notes could well ensue.
The main way to trade this particular instrument is via futures contracts on the 10-Year Note. The price of the continuous contract hit an all-time high of 135.50 in July, the converse of the low in yields. One clue back then that it might be peaking came from the failure of its daily and weekly relative strength indices (RSI) to make new highs along with the price. Since then, it has pulled back by a couple of per cent, although not that aggressively so far.
If the experience of QE1 and QE2 are anything to go by, the 10-year note's losses could accelerate before long. During both those episodes, the price ended up falling through its 55-week exponential moving average, a line that currently sits at 131.13, some way below the current price. Nor is weekly momentum - as measured by the RSI - anything like as beaten up as it was at its previous lows.
Bearish bonds
For the purposes of going short, I would turn to the daily chart and wait for the price to rally to around its 21-day exponential moving average. Then, as it fell back below that line, I would enter my trade. As to taking profits, I might wait until it registered an oversold daily RSI reading of around 30 per cent and then started to bounce a bit.
You don't need a futures account to speculate on changes in US 10-year futures prices. A spread bet is probably the cheapest and simplest way to trade this particular market. With some firms, you can bet as little as 50p per point - equivalent to a total value of less than £7,000 worth of futures. Any profits on such a trade will not attract capital gains tax, unlike, say, an ETF exposed to the underlying bonds.
