October 29th, 2008

See me in the latest issue of "Technical Analyst", Trading Volatility with the VIX

All about "da Fed"

FOMC days often make for a long and relatively boring session in the bond pit and today was no exception.  The 30 year Treasury futures traded in a relatively tight range pre-announcement.  Aside from a quick rally to the 117 area, prices fluctuated between 116 and 116 and a half for much of the session. 

The only economic release for traders to digest was the September durable goods data.  The number was reported better than expectations and while only slightly in positive territory it was a much better showing than last month's draw of 4.5%.  Durable goods orders were slightly bond bearish but traders had their eyes on the Fed's interest rate decision.    

Post-Fed announcement, Treasury trade picked up considerably.  A 50 basis point cut, and verbal confirmation that the economy will continue to struggle despite measures taken in terms of monetary policy didn't seem to propel the bull camp as one may have assumed.  Instead, the seemingly drastic moves by the Fed aroused inflation fears down the road.  As a result, the long bond suffered substantial losses by day's end. 

The Fed Fund futures are pricing in another quarter point cut by the December meeting, and have even priced in a 20% chance of a 50 basis point cut.  If that actually becomes a reality, the overnight rate will be .5%.  While this is certainly possible, the market has a way of getting ahead of itself, and this may be a prime example.  Accordingly, I like the idea of selling the December Eurodollar at 97.99, which implies a three month interest rate of 2% (this includes the risk free rate plus default risk).  It can go higher, but logic tells me that the this is an attractive short. 

Treasuries on the other hand, don't seem to be following logic.  The bonds and notes are trading at or near key pivot levels making it very difficult to pick a direction.  I hate to be "wishy washy" but I am not going to make recommendations or speculations that I don't feel good about. 

Treasury Bond Option Trading Recommendations

**There is unlimited risk in naked option selling.

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Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

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Euro Dollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

October 29 - Sell 1 December Eurodollar at 97.99

There is substantial risk of loss in trading futures and options.