December 4th, 2008

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Bond buyers aren't shy, bulls dominate trade.

If you shoot a bullet into the air, it will eventually come down.  However, the timing and the magnitude of the rise and fall are questionable.  The same can be said of the Treasury market. 

I am getting tired of writing about the bond rally, or bubble if you prefer, and I am sure that readers are equally as bored with reading about it.  I have been following the markets long enough to know that there is virtually no limit to the potential devastation that a runaway market poses.  If you recall the 2007/2008 commodity rally and subsequent meltdown, trade was similar.  The markets rallied to levels many believed to be impossible and eventually fundamentals caught up with price.  However, the eventual decline doesn't begin to satisfy those that sustained unimaginable losses.  I am afraid that by the time the Treasury rally ends, many of the bears won't be around to share in the glory. 

Unfortunately, this is a vicious cycle played out from time to time; all that we can do is learn from it.  A similar spike in Treasuries occurred in October of 1998.  Based on a continuous chart (which has its limitations due to contract roll overs), the long bond has only been at such levels one other time during its reign at the CBOT.  After a sharp rally to the mid-130's the 30-year Treasury futures underwent an immediate plunge from grace.  History will likely repeat itself in some form, but there is no way to predict how high the market will go before coming to a more realistic level.  At this stage in the game it is important to position yourself in a way that you can stay in the game. 

Some are asking me why I have been bearish, not bullish.  The answer is that I was bullish, at 111/112 and looking for a rally.  I became bearish near 122/123.  Based on the information that we had at that time, seemed to be a reasonable stance.  I don't have a problem admitting when I am wrong, and I was wrong about the magnitude of this rally.  In the past, we have called the markets relatively well but we don't have a crystal ball and this time around it would have been even more handy than I had ever imagined. 

The possibility of government intervention continues to drive prices on the long end higher and the 10-year note looks to be on for the ride.  Conversely, there are signs that the short end of the curve is having trouble keeping up.  With jobs data looming, the market seemed vulnerable to a corrective pullback but it simply wasn't meant to be.  Instead, panicked short specs continue to cover. 

Tomorrow's employment report could be surprisingly volatile.  Perhaps we will see a blow off top that could extend to 135 in the March 30 year bond or 125'15 in the 10-year note.  Playing the upside seems like suicide, but so does playing the downside.  Unless you have deep pockets and a heart of steel, keep it simple and your risk limited.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

December 2 - We recommended buying the January 119 puts for 20 or better.

November 26 - Buy the January 10 year note 115 puts for about 15 ticks.

November 18 - I like selling the January 130 calls for 30 ticks or better, but slightly more aggressive traders may look at the129 calls for 30 (this was getting filled today). 

·         You may have taken our advice to roll into the March 136 calls for even money.  This lowers the delta and the margin, hopefully improving the odds of riding this out. 

November 20 - We were recommending to buy the December T- note 112 puts for about 19 ticks. 

·         November 24 - You can get in at a better price, you may want to buy the 113's. 

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

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