November 10th, 2008

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

U.S. Treasury demand remains high in the face of low yields.

After being held down on supply concerns, the Treasury market enjoyed a shift in the demand side of the equation.   Healthy demand in a 3 year auction led players to believe that the upcoming auction of $30 billion in 10 and 30 year issues will also see some buying interest. 

Additional support likely came from this morning's round of corporate bankruptcy and going concern announcements.  As domestic corporations scramble to raise cash, they have become sharply out of favor to the default risk free Treasury alternatives.  Investors seem to be content with much smaller yields in exchange for less heartache. 

The Fed Funds futures continue to price in a 50 basis point cut by the December meeting, and seem to be probing for even more cuts by early next year.  I can't help but believe that the short end of the curve has completely outdone itself.  Eurodollar prices are implying a yield of under 2% making a correction seem imminent.  If you participated in the trade below, be thankful that you purchased the call as insurance and be patient.  Assuming that you leave the spread intact, it can only get better from here.    However, the long call expires on Friday and it may be necessary to adjust the trade in order to remain exposed to the market.  Stay tuned for details. 

Volume was extremely light ahead of the Veteran's day holiday.  While electronic Treasury futures remain open for business as usual, the cash market securities and open outcry futures and options closed early today and will re-open on
Wednesday. 

On Friday we noted that we weren't putting too much into the Treasury selling as it was believed to be driven by end of the week position squaring as opposed to market fundamentals.  We also pointed out support in the 30 year bond futures near 115'08 and mentioned that it was necessary to hold above this area to keep the bulls in control.  So far this has been the case leaving the next upside target in the long bond at 118'14.  However, should equities attempt to retest the lows we could see 30 year bond futures rally to 120'24.

The 10 year note futures look to be well on their way to 116'24 with a longer term target of 117'30 should stocks spike lower in the coming sessions.  I still believe that the five year note is largely overbought, but you may want to consider buying the 116 calls for insurance.  They are running about $500; call me for details. 

Treasury Bond Option Trading Recommendations

**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

November 4 - Sell 1 December Five year note futures at 115'16.

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

October 29 - Sell 1 December Eurodollar at 97.79

·         October 31 - Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy.  Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees.  The profit potential is theoretically unlimited!!

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