November 17th, 2008

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

Low yields but high demand for Treasuries

Another bout of weak economic news sparked a wave of safe haven buying interest in Treasuries but the market failed to hold the bid.  The intraday upward momentum in equities shaved some of the bond bull enthusiasm but interest rate trade looks to be becoming independent in some aspects.  It is highly possible that bonds and stocks could rise together; however the window of opportunity for significant gains in Treasuries seems to be limited. 

We are looking for some type of spike high in prices across the curve (spike low in yields) but also believe that if such a move is going to materialize it must do so in the near-term.  Some are calling the recent string of financial market and economic turmoil the largest flow of fundamental bullish information in history.  Unfortunately for the bulls, bond and note prices have been weighed by supply concerns in light of the Fed's relentless attempt at funding bailouts with Treasury issues and one of the quickest inflationary implosions ever witnessed. 

Also favoring the upside in Treasuries is the exploding U.S. greenback as traders are always forward looking.  If you recall the early 1980's, near the end of a period of hyperinflation, the dollar rallied to eventually attract foreign buyers into Treasuries.  While it is possible that some foreign assets will make their way to real estate and equities, fixed income securities will likely be a favorite. 

In Friday's newsletter, we noted resistance in the long bond near 119'15.  Today's high of 119'20 was enough to satisfy the market's need to test statistical resistance but didn't quite retest the highs set in late October.  My models and instincts tell me that we will see a high of at minimum 121 in the December futures before this move exhausts itself. 

We also set a target of 118 in the 10 year note and that seems to be becoming a reality with the next major area of resistance near 118'15.  In the case of the note, 118'15 appears to be an attractive selling point. 

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 17 - Sell 1 December 10 Year Note futures at 118'15.

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

·         November 11 - Some of you may have acted on the suggestion to buy the 116 calls for protection, the cost was $500.  If not, don't panic...patience is a virtue.

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat